SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2004
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR TRANSITION PERIOD FROM ________ TO ________
Commission File Number: 000-25887
---------
PRIVATEBANCORP, INC.
(Exact name of Registrant as specified in its charter.)
DELAWARE 36-3681151
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
TEN NORTH DEARBORN STREET
CHICAGO, ILLINOIS 60602
(Address of principal executive offices) (Zip Code)
(312) 683-7100
(Registrant's telephone number, including area code)
Indicate by checkmark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by checkmark whether the Registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act). Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
===============================================================================
CLASS OUTSTANDING AS OF JULY 30, 2004
- -------------------------------------------------------------------------------
Common, no par value 20,311,600
===============================================================================
PRIVATEBANCORP, INC.
FORM 10-Q QUARTERLY REPORT
TABLE OF CONTENTS
Page
Number
------
Selected Financial Data........................................................3
Part I ......................................................................5
Item 1. Financial Statements.........................................5
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations..........19
Item 3. Quantitative and Qualitative Disclosures
About Market Risk.........................................43
Item 4. Controls and Procedures.....................................46
Part II .....................................................................47
Item 1. Legal Proceedings...........................................47
Item 2. Changes in Securities, Use of Proceeds
and Issuer Purchases of Equity Securities.................47
Item 3. Defaults upon Senior Securities.............................47
Item 4. Submission of Matters to a Vote of
Security Holders..........................................47
Item 5. Other Information...........................................48
Item 6. Exhibits and Reports on Form 8-K............................49
Signatures....................................................................50
2
SELECTED FINANCIAL DATA
The following table summarizes certain selected unaudited consolidated
financial information of PrivateBancorp, Inc. at or for the periods indicated.
This information should be read in conjunction with the unaudited consolidated
financial statements and related notes included pursuant to Item 1 of this
report.
QUARTER ENDED
-------------------------------------------------------------------
06/30/04 03/31/04 12/31/03 09/30/03 06/30/03
------------ ------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
SELECTED STATEMENT OF INCOME DATA:
INTEREST INCOME:
Loans, including fees............... $ 18,702 $ 17,680 $ 16,588 $ 15,830 $ 15,208
Securities.......................... 7,820 7,929 7,773 6,333 5,148
Federal funds sold and
interest-bearing deposits....... 4 6 6 6 31
-------- -------- -------- --------- ---------
Total interest income............ 26,526 25,615 24,367 22,169 20,387
-------- -------- -------- --------- ---------
INTEREST EXPENSE:
Interest-bearing demand deposits.... 66 147 143 134 148
Savings and money market deposit
accounts......................... 2,541 1,874 1,697 1,375 1,644
Brokered deposits and other time
deposits......................... 4,548 4,072 4,300 4,346 4,348
Funds borrowed...................... 1,552 1,486 970 1,016 1,204
Long-term debt --trust preferred
securities....................... 485 485 485 485 485
-------- -------- -------- --------- ---------
Total interest expense........... 9,192 8,064 7,595 7,356 7,829
-------- -------- -------- --------- ---------
Net interest income (8).......... 17,334 17,551 16,772 14,813 12,558
Provision for loan losses........... 724 1,326 1,595 1,092 730
-------- -------- -------- --------- ---------
Net interest income after provision
for loan losses.................. 16,610 16,225 15,177 13,721 11,828
-------- -------- -------- --------- ---------
Wealth management, mortgage banking
and other income................. 3,472 2,980 2,889 3,657 3,181
Securities (losses) gains, net...... (1,166) 998 (163) (333) 2,310
Trading gains (losses) on interest
rate swap........................ 1,325 (1,066) 280 765 (1,054)
-------- -------- -------- --------- ---------
Total non-interest income........ 3,631 2,912 3,006 4,089 4,437
-------- -------- -------- --------- ---------
NON-INTEREST EXPENSE:
Salaries and employee benefits...... 6,057 6,035 5,670 5,338 5,070
Occupancy expense................... 1,350 1,360 1,472 1,403 1,270
Professional fees................... 1,451 1,114 1,189 1,130 1,069
Marketing........................... 703 495 678 855 509
Data processing..................... 513 446 391 376 368
Insurance........................... 207 215 200 186 146
Amortization of intangibles......... 42 42 42 42 42
Other operating expenses............ 897 832 724 1,273 1,282
-------- -------- -------- --------- ---------
Total non-interest expense....... 11,220 10,539 10,366 10,603 9,756
-------- -------- -------- --------- ---------
Minority interest expense.............. 65 67 52 59 44
Income before income taxes.......... 8,956 8,531 7,765 7,148 6,465
-------- -------- -------- --------- ---------
Income tax expense..................... 2,500 2,581 2,042 2,018 1,852
-------- -------- -------- --------- ---------
Net income.......................... $ 6,456 $ 5,950 $ 5,723 $ 5,130 $ 4,613
======== ======== ======== ========= =========
PER SHARE DATA:
Basic earnings......................... $ 0.33 $ 0.31 $ 0.30 $ 0.28 $ 0.30
Diluted earnings....................... 0.31 0.29 0.28 0.27 0.28
Dividends.............................. 0.03 0.03 0.02 0.02 0.02
Book value (at end of period).......... 8.54 8.72 8.47 8.19 6.45
All previously reported share and per share data has
been restated to reflect the 2-for-1 stock split
which occurred on May 31, 2004
3
QUARTER ENDED
-------------------------------------------------------------------
06/30/04 03/31/04 12/31/03 09/30/03 06/30/03
------------ ------------ ------------ ------------ ------------
SELECTED FINANCIAL DATA (AT END OF PERIOD):
Total securities(1)......................... $ 722,582 $ 692,678 $ 699,262 $ 647,433 $ 581,743
Total loans................................. 1,407,586 1,344,707 1,224,657 1,131,706 1,066,919
Total assets................................ 2,199,170 2,139,095 1,984,923 1,857,103 1,759,676
Total deposits.............................. 1,673,404 1,622,899 1,547,359 1,476,047 1,445,590
Funds borrowed.............................. 306,447 297,537 219,563 164,491 170,433
Long-term debt--trust preferred securities.. 20,000 20,000 20,000 20,000 20,000
Total stockholders' equity.................. 173,669 174,041 166,956 161,105 100,340
Wealth management assets under management... 1,590,119 1,576,218 1,494,881 1,320,175 1,264,955
SELECTED FINANCIAL RATIOS AND OTHER DATA:
Performance Ratios:
Net interest margin(2)(8)................ 3.51% 3.80% 3.82% 3.64% 3.33%
Net interest spread(3)................... 3.24 3.57 3.60 3.43 3.16
Non-interest income to
average assets........................ 0.67 0.57 0.63 0.92 1.06
Non-interest expense to
average assets........................ 2.08 2.08 2.16 2.38 2.33
Net overhead ratio(4).................... 1.41 1.51 1.53 1.46 1.27
Efficiency ratio(5),(8).................. 50.8 49.1 50.1 53.9 55.0
Return on average assets(6).............. 1.20 1.17 1.19 1.15 1.10
Return on average equity(7).............. 14.86 13.87 14.03 14.57 18.81
Fee income to total revenue(8),(9)....... 16.69 14.51 14.69 19.80 20.21
Dividend payout ratio.................... 9.42 10.03 6.89 7.67 6.75
Asset Quality Ratios:
Non-performing loans to total loans 0.06% 0.06% 0.09% 0.17% 0.26%
Allowance for loan losses to:
total loans........................... 1.23 1.23 1.23 1.23 1.22
non-performing loans.................. 2175 1954 1343 676 476
Net charge-offs (recoveries) to
average total loans................... (0.01) (0.03) 0.12 0.09 0.07
Non-performing assets to
total assets.......................... 0.04 0.04 0.06 0.10 0.16
Non-accrual loans to total loans......... 0.01 0.01 0.00 0.05 0.08
Balance Sheet Ratios:
Loans to deposits........................ 84.3% 82.9% 79.1% 76.7% 73.8%
Average interest-earning assets to
average interest-bearing
liabilities........................... 114.9 113.5 113.9 112.4 108.2
Capital Ratios:
Total equity to total assets............. 7.90% 8.14% 8.41% 8.68% 5.70%
Total risk-based capital ratio........... 12.14 12.14 12.71 12.88 8.37
Tier 1 risk-based capital ratio.......... 11.00 11.01 11.59 11.79 7.06
Leverage ratio........................... 7.82 8.03 8.25 8.52 5.23
<FN>
- ------------------
(1) The entire securities portfolio was classified as "available-for-sale"
for the periods presented.
(2) Net interest income, on a tax-equivalent basis, divided by average
interest-earning assets.
(3) Yield on average interest-earning assets less rate on average
interest-bearing liabilities.
(4) Non-interest expense less non-interest income divided by average total
assets.
(5) Non-interest expense divided by the sum of net interest income (tax
equivalent) plus non-interest income.
(6) Net income divided by average total assets.
(7) Net income divided by average common equity.
(8) The company adjusts GAAP reported net interest income by the tax
equivalent adjustment amount to account for the tax attributes on
federally tax exempt municipal securities. For GAAP purposes, tax
benefits associated with federally tax-exempt municipal securities are
reflected in income tax expense. The following table reconciles
reported net interest income to net interest income on a tax equivalent
basis for the periods presented:
RECONCILIATION OF NET INTEREST INCOME TO NET INTEREST INCOME ON A TAX EQUIVALENT BASIS
2Q04 1Q04 4Q03 3Q03 2Q03
------ ------ ------ ------ ------
Net interest income........................ $17,334 $17,551 $16,772 $14,813 $12,558
Tax equivalent adjustment to net
interest income......................... 1,100 1,017 925 772 742
------- ------- ------- ------- -------
Net interest income, tax equivalent basis.. $18,434 $18,568 $17,697 $15,585 $13,300
======= ======= ======= ======= =======
(9) Wealth management, mortgage banking & other income as a percentage of
the sum of net interest income and wealth management, mortgage banking
& other income.
</FN>
4
PART I
ITEM 1. FINANCIAL STATEMENTS
PRIVATEBANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
DECEMBER 31,
JUNE 30, 2004 2003 JUNE 30, 2003
------------- ------------ -------------
(UNAUDITED) (UNAUDITED)
ASSETS
Cash and due from banks.......................... $ 22,414 $ 49,115 $ 51,771
Federal funds sold and other
short-term investments ........................ 1,779 985 9,145
---------- ---------- -----------
Total cash and cash equivalents............... 24,193 50,100 60,916
---------- ---------- -----------
Loans held for sale.............................. 6,419 4,420 12,570
Available-for-sale securities, at fair value..... 722,582 669,262 581,743
Loans, net of unearned discount.................. 1,407,586 1,224,657 1,066,919
Allowance for loan losses........................ (17,304) (15,100) (13,019)
---------- ---------- -----------
Net loans..................................... 1,390,282 1,209,557 1,053,900
---------- ---------- -----------
Goodwill......................................... 20,547 19,242 19,242
Premises and equipment, net...................... 5,711 6,233 6,284
Accrued interest receivable...................... 8,892 7,868 7,159
Other assets..................................... 20,544 18,241 17,862
---------- ---------- -----------
Total assets.................................. $2,199,170 $1,984,923 $ 1,759,676
========== ========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Demand deposits:
Non-interest-bearing.......................... $ 163,543 $ 135,110 $ 110,244
Interest-bearing.............................. 89,810 85,083 79,397
Savings and money market deposit accounts........ 683,205 562,234 497,437
Brokered deposits................................ 413,813 447,948 438,652
Other time deposits.............................. 323,033 316,984 319,860
---------- ---------- ----------
Total deposits................................ 1,673,404 1,547,359 1,445,590
Funds borrowed................................... 306,447 219,563 170,433
Long-term debt --trust preferred securities...... 20,000 20,000 20,000
Accrued interest payable......................... 3,797 5,053 4,892
Other liabilities................................ 21,853 25,992 18,421
---------- ---------- ----------
Total liabilities............................. 2,025,501 1,817,967 1,659,336
========== ========== ==========
STOCKHOLDERS' EQUITY
Preferred stock, 1,000,000 shares authorized..... -- -- --
Common stock, without par value, $1 stated value;
39,000,000 shares authorized; 20,344,073,
19,945,849, and 15,574,028 shares
issued and outstanding as of June 30, 2004,
December 31, 2003 and June 30, 2003,
respectively.................................. 20,344 19,707 15,574
Treasury stock................................... (1,662) -- --
Additional paid-in-capital....................... 99,155 93,943 37,930
Retained earnings................................ 57,682 46,193 35,377
Accumulated other comprehensive income........... 3,052 9,909 11,861
Deferred compensation............................ (4,902) (2,796) (402)
---------- ---------- ----------
Total stockholders' equity.................... 173,669 166,956 100,340
---------- ---------- ----------
Total liabilities and stockholders' equity.... $2,199,170 $1,984,923 $1,759,676
========== ========== ==========
The accompanying notes to consolidated financial statements are an
integral part of these statements. All previously reported
share and per share data has been restated to reflect
the 2-for-1 stock split which occurred on May 31, 2004.
5
PRIVATEBANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- ----------------------
2004 2003 2004 2003
-------- -------- -------- --------
INTEREST INCOME
Loans, including fees............................. $18,702 $15,208 $36,382 $30,375
Federal funds sold and interest bearing deposits.. 4 31 10 56
------- ------- ------- -------
Securities:
Taxable ..................................... 5,288 3,451 10,879 7,243
Exempt from federal income taxes............. 2,532 1,697 4,870 3,284
Total interest income......................... 26,526 20,387 52,141 40,958
------- ------- ------- -------
INTEREST EXPENSE
Deposits:
Interest-bearing demand........................ 66 148 213 276
Savings and money market deposit accounts...... 2,541 1,644 4,415 3,353
Brokered deposits and other time deposits...... 4,548 4,348 8,620 8,288
Funds borrowed.................................... 1,552 1,204 3,038 2,516
Long-term debt -- trust preferred securities...... 485 485 970 970
------- ------- ------- -------
Total interest expense......................... 9,192 7,829 17,256 15,403
------- ------- ------- -------
Net interest income............................ 17,334 12,558 34,885 25,555
------- ------- ------- -------
Provision for loan losses......................... 724 730 2,050 1,686
------- ------- ------- -------
Net interest income after provision
for loan losses................................ 16,610 11,828 32,835 23,869
------- ------- ------- -------
NON-INTEREST INCOME
Wealth management, mortgage banking
and other income............................... 3,472 3,181 6,452 5,882
Securities (losses) gains, net................... (1,166) 2,310 (168) 2,255
Trading gains (losses) on interest rate swap..... 1,325 (1,054) 259 (1,284)
------- ------- ------- -------
Total non-interest income...................... 3,631 4,437 6,543 6,853
------- ------- ------- -------
NON-INTEREST EXPENSE
Salaries and employee benefits.................... 6,057 5,070 12,092 9,848
Occupancy expense, net............................ 1,350 1,270 2,710 2,689
Professional fees................................. 1,451 1,069 2,565 2,353
Marketing......................................... 703 509 1,198 995
Data processing................................... 513 368 960 761
Postage, telephone & delivery..................... 227 212 456 424
Insurance......................................... 207 146 422 314
Amortization of intangibles....................... 42 42 84 84
Other non-interest expense........................ 670 1,070 1,272 1,707
------- ------- ------- -------
Total non-interest expense..................... 11,220 9,756 21,759 19,175
------- ------- ------- -------
Minority interest expense......................... 65 44 132 82
------- ------- ------- -------
Income before income taxes..................... 8,956 6,465 17,487 11,465
------- ------- ------- -------
Income tax provision.............................. 2,500 1,852 5,081 3,249
------- ------- ------- -------
Net income..................................... $ 6,456 $ 4,613 $12,406 $ 8,216
======= ======= ======= =======
Basic earnings per share.......................... $ 0.33 $ 0.30 $ 0.63 $ 0.54
Diluted earnings per share........................ $ 0.31 $ 0.28 $ 0.60 $ 0.50
The accompanying notes to consolidated financial statements are an integral
part of these statements. All previously reported share and per share data has
been restated to reflect the 2-for-1 stock split which occurred
on May 31, 2004.
6
PRIVATEBANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 30, 2004 AND 2003 (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
ACCUMULATED
OTHER
ADDITIONAL COMPRE- DEFERRED TOTAL
COMMON TREASURY PAID-IN- RETAINED HENSIVE COMPEN- STOCKHOLDERS'
STOCK STOCK CAPITAL EARNINGS INCOME SATION EQUITY
-------- -------- ---------- ---------- ------------ --------- -------------
BALANCE, JANUARY 1, 2003..... $15,408 $ -- $37,663 $27,784 $ 8,826 $ (589) $ 89,092
Net income................... -- -- 8,216 -- -- 8,216
Net increase in fair
value of securities
classified as
available-for-sale,
net of income taxes
and reclassification
adjustments............... -- -- -- -- 3,035 -- 3,035
------- ------- ------- ------- ------- ------- --------
Total comprehensive income... -- -- -- 8,216 3,035 -- 11,251
------- ------- ------- ------- ------- ------- --------
Cash dividends declared
($0.04 per share)......... -- -- -- (623) -- -- (623)
Issuance of common stock..... 166 -- 267 -- -- -- 433
Awards granted, net of
forfeitures............... -- -- -- -- -- 120 120
Amortization of deferred
compensation.............. -- -- -- -- -- 67 67
------- ------- ------- ------- ------- ------- --------
BALANCE, JUNE 30, 2003....... $15,574 $ -- $37,930 $35,377 $11,861 $ (402) $100,340
======= ======= ======= ======= ======= ======= ========
BALANCE, JANUARY 1, 2004..... $19,707 $ -- $93,943 $46,193 $ 9,909 $(2,796) $166,956
Net income................... -- -- -- 12,406 -- -- 12,406
Net increase in fair
value of securities
classified as
available-for-sale,
net of income taxes
and reclassification
adjustments............... -- -- -- -- (6,857) -- (6,857)
------- ------- ------- ------- ------- ------- --------
Total comprehensive income... -- -- -- 12,406 (6,857) -- 5,549
------- ------- ------- ------- ======= ------- --------
Cash dividends declared
($0.06 per share)......... -- -- -- (1,205) -- -- (1,205)
Issuance of common stock..... 668 -- 4,466 -- -- -- 5,134
Acquisition of treasury
stock..................... (31) (1,662) 746 -- -- -- (947)
Awards granted, net of (2,599)
forfeitures............... -- -- -- -- -- (2,599)
Amortization of deferred
compensation.............. -- -- -- 288 -- 493 781
------- ------- ------- ------- ------- ------- --------
BALANCE, JUNE 30, 2004....... $20,344 $(1,662) $99,155 $57,682 $ 3,052 $(4,902) $173,669
======= ======= ======= ======= ======= ======= ========
The accompanying notes to consolidated financial statements are an integral
part of these statements. All previously reported share and per share data has
been restated to reflect the 2-for-1 stock split which occurred
on May 31, 2004.
7
PRIVATEBANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2004 AND 2003 (UNAUDITED)
(IN THOUSANDS)
SIX MONTHS ENDED
JUNE 30,
------------------------
2004 2003
---------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income............................................................... $ 12,406 $ 8,216
--------- --------
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization......................................... 816 738
Amortization of deferred compensation, net of forfeitures............. 493 67
Provision for loan losses............................................. 2,050 1,686
Net loss (gain) on sale of securities................................. 168 (2,255)
Trading (gains) losses on interest rate swap.......................... (259) 1,284
Net (increase) decrease in loans held for sale........................ (1,999) 1,750
Decrease in deferred loan fees........................................ (190) (378)
(Increase) decrease in accrued interest receivable.................... (1,025) 2,268
Decrease in accrued interest payable.................................. (1,256) (94)
Increase in other assets.............................................. (2,403) (150)
(Decrease) increase in other liabilities.............................. (448) 2,747
--------- --------
Total adjustments..................................................... (4,053) 7,663
--------- --------
Net cash provided by operating activities............................. 8,353 15,879
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities, paydowns, and sales
of available-for-sale securities..................................... 125,451 40,390
Purchase of securities available-for-sale................................ (189,071) (129,544)
Net loan principal advanced.............................................. (182,490) (101,063)
Minority Interest in Lodestar Investment Counsel, LLC.................... 132 --
Acquisition of Corley Financial Corporation.............................. (475) --
Premises and equipment expenditures...................................... (249) (272)
--------- --------
Net cash used in investing activities................................. (246,702) (190,489)
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in total deposits........................................... 126,050 240,330
Proceeds from exercise of stock options.................................. 2,376 553
Acquisition of treasury stock............................................ (1,662) --
Dividends paid........................................................... (1,205) (623)
Issuance of borrowings................................................... 176,447 101,433
Repayment of borrowings.................................................. (89,564) (140,954)
--------- --------
Net cash provided by financing activities............................. 212,442 200,739
--------- --------
Net (decrease) increase in cash and cash equivalents..................... (25,907) 26,129
Cash and cash equivalents at beginning of year........................... 50,100 34,787
--------- --------
Cash and cash equivalents at end of period............................... $ 24,193 $ 60,916
========= ========
The accompanying notes to consolidated financial statements are an integral
part of these statements. All previously reported share and per share data has
been restated to reflect the 2-for-1 stock split which occurred
on May 31, 2004.
8
PRIVATEBANCORP, INC. AND SUBSIDIARIES
NOTE 1--BASIS OF PRESENTATION
The consolidated financial information of PRIVATEBANCORP, Inc. (the
"Company") and its subsidiaries, The PrivateBank and Trust Company (the "Bank"
or "The PrivateBank (Chicago)"), The PrivateBank (St. Louis) and The PrivateBank
Mortgage Company (the "Mortgage Company") included herein is unaudited; however,
such information reflects all adjustments (consisting only of normal recurring
adjustments), which are, in the opinion of management, necessary for a fair
presentation for the interim periods. The financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X.
The annualized results of operations for the six months ended June 30,
2004 are not necessarily indicative of the results expected for the full year
ending December 31, 2004. The accompanying consolidated financial statements are
unaudited and do not include information or footnotes necessary for a complete
presentation of financial condition, results of operations, or cash flows in
accordance with generally accepted accounting principles. The June 30, 2004
consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes for the year ended December 31, 2003
included in the Company's Annual Report on Form 10-K.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of income and expense during the reported
period. Actual results could differ from these estimates.
Certain reclassifications have been made to prior periods' consolidated
financial statements to place them on a basis comparable with the current
period's consolidated financial statements.
NOTE 2--ACCOUNTING FOR STOCK-BASED COMPENSATION
Pursuant to SFAS No. 148, Accounting for Stock-Based Compensation (SFAS
No. 148), pro forma net income and pro forma earnings per share are presented in
the following table as if the fair value method of accounting for stock-based
compensation plans had been utilized.
THREE MONTHS ENDED
JUNE 30,
--------------------------
2004 2003
------------ ------------
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
Net income
As reported................... $6,456 $4,613
Pro forma..................... $6,147 4,586
Basic earnings per share
As reported................... $ 0.33 $ 0.30
Pro forma..................... 0.31 0.30
Diluted earnings per share
As reported................... $ 0.31 $ 0.28
Pro forma..................... 0.30 0.28
9
SIX MONTHS ENDED
JUNE 30,
--------------------------
2004 2003
------------ ------------
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
Net income
As reported.................. $12,406 $8,216
Pro forma.................... $11,788 8,162
Basic earnings per share
As reported.................. $ 0.63 $ 0.54
Pro forma.................... 0.60 0.54
Diluted earnings per share
As reported.................. $ 0.60 $ 0.51
Pro forma.................... 0.57 0.50
During the second quarter of 2004, the Company adopted the binomial
method of valuing options for options granted in the second quarter and going
forward. Previously the Black-Scholes method was used, however regulatory and
accounting guidance have recommended the binomial method as it takes into
account more assumptions about a grant's features, and better estimates
employees' likely behavior regarding investments. The binomial model tends to
produce a lower estimate of option value than Black-Scholes.
In determining the fair value of each option grant for purposes of the
above pro forma disclosures, the Company used the following assumptions for
grants made in 2004: dividend yield of 0.40%; risk-free interest rate of 3.60%;
expected lives of 7 years for the stock options; and expected volatility of
approximately 30%, computed from an index of strategic peer company composite
volatility over a one year basis. The following assumptions for grants made in
2003 were used: dividend yield of 0.40%; risk-free interest rate of 4.55%;
expected lives of 10 years for the stock options; and expected volatility of
approximately 46%. During the second quarter 2004, the Company granted 185,200
stock options with an exercise price of $26.89 to certain members of management
that vest over 4 years. Additionally, the Company granted 1,200 stock options
with an exercise price of $28.40 to a member of management that vest over 4
years.
NOTE 3--EARNINGS PER SHARE
The following table shows the computation of basic and diluted earnings
per share (in thousands except per share data) for the six months ended June 30,
2004 and 2003:
SIX MONTHS ENDED
JUNE 30,
--------------------------
2004 2003
------------ ------------
Net income....................................... $12,406 $ 8,216
Weighted average common shares outstanding....... 19,541 15,250
Weighted average common shares equivalent(1)..... 965 1,040
------- -------
Weighted average common shares and
common share equivalents...................... 20,506 16,290
======= =======
Net income per average common share - basic...... $ 0.63 $ 0.54
Net income per average common share - diluted.... $ 0.60 $ 0.50
(1) Common shares equivalent result from stock options being treated as if
they had been exercised and are computed by application of the treasury
stock method.
10
NOTE 4--NEW ACCOUNTING STANDARDS
In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46),
Consolidation of Variable Interest Entities. The objective of this
interpretation is to provide guidance on how to identify a variable interest
entity (VIE) and determine when the assets, liabilities, noncontrolling interest
and results of operations of a VIE need to be included in a company's
consolidated financial statements. The adoption of FIN 46 did not have a
material impact on its results of operations, financial position or liquidity.
On March 9, 2004, the SEC staff issued Staff Accounting Bulletin No.
105, Application of Accounting Principles to Loan Commitments, which provides
guidance regarding mortgage loan interest rate lock commitments related to loans
held for sale as written options, effective for commitments entered into after
March 31, 2004. The Company accounts for loan commitments on single-family
mortgages that it intends to sell as derivatives in accordance with FASB
Statement No. 133, Accounting for Derivative Instruments and Hedging Activities.
Loan commitments are recorded at zero on the date of issuance and are adjusted
through earnings thereafter for changes in interest rates. In accordance with
SAB 105, the Company does not include in the fair value of loan commitments any
value for future servicing rights or other intangible assets. The adoption of
SAB 105 did not have a material impact on the second quarter 2004.
NOTE 5--OPERATING SEGMENTS
For purposes of making operating decisions and assessing performance,
management regards The PrivateBank (Chicago), The PrivateBank (St. Louis),
Wealth Management and the Holding Company as four operating segments. The
Company's investment securities portfolio is comprised of the two banks'
portfolios and, accordingly, each portfolio is included in total assets and
reported in the results of The PrivateBank (Chicago) and The PrivateBank (St.
Louis). Compensation expense related to the management of the investment
portfolios is allocated solely to The PrivateBank (Chicago). Insurance expense
for the Company is allocated to The PrivateBank (Chicago), the Holding Company
and the Wealth Management segments. The results for each business segment are
summarized in the paragraphs below and included in the following segment tables.
We apply the accrual basis of accounting for each reportable segment
and for transactions between reportable segments. During the first six months of
2004, there were no changes in the measurement methods used to determine
reported segment profit or loss as compared to the same period in 2003. For the
periods presented, there are no asymmetrical allocations to segments requiring
disclosure.
The accounting policies of the segments are generally the same as those
described in Note 1 -- Basis of Presentation to the consolidated financial
statements included in this report.
THE PRIVATEBANK (CHICAGO)
The PrivateBank (Chicago), through its main office located in downtown
Chicago as well as six full-service Chicago suburban locations, provides
personal and commercial banking services primarily to affluent individuals,
professionals, entrepreneurs and their business interests. The PrivateBank
(Chicago)'s commercial lending products include lines of credit for working
capital, term loans for equipment and letters of credit to support the
commitments made by its clients. Non-credit products include lock-box, cash
concentration accounts, merchant credit card processing, electronic funds
transfer, other cash management products and insurance. The PrivateBank
(Chicago) offers a full range of real estate lending products including fixed
and floating rate permanent and mini-permanent mortgages, construction and
commercial real estate loans. Personal loans include installment loans and lines
of credit, home equity loans and a wide variety of home mortgage loans.
11
Individual banking services include interest-bearing checking, money
market accounts, certificates of deposit, ATM/debit cards and investment
brokerage accounts. Additionally, The PrivateBank (Chicago) offers secured and
unsecured personal loans and lines of credit. Through The PrivateBank
(Chicago)'s affiliations with Mesirow Financial, Inc. and Sterling Investment
Services, Inc., clients have access to insurance products and securities
brokerage services. The PrivateBank (Chicago) also offers domestic and
international wire transfers and foreign currency exchange. The PrivateBank
(Chicago) balance sheet reflects goodwill of $19.2 million and intangibles of
$2.3 million at June 30, 2004, which remained relatively unchanged compared to
December 31, 2003 balances.
THE PRIVATEBANK (CHICAGO)
-----------------------------------
JUNE 30,
-----------------------------------
2004 2003
---------------- ----------------
(IN THOUSANDS)
Total gross loans......... $1,239,269 $ 942,704
Total assets.............. 1,954,978 1,577,124
Total deposits............ 1,524,379 1,303,753
Total borrowings.......... 254,352 119,910
Total capital............. 153,958 136,157
Net interest income....... 29,846 22,613
Non-interest income....... 2,819 4,063
Non-interest expense...... 13,311 12,059
Net income................ 12,384 9,096
THE PRIVATEBANK (ST. LOUIS)
The PrivateBank (St. Louis), a federal savings bank, was established as
a new bank subsidiary of the Company on June 23, 2000, and through its main
office located in St. Louis, Missouri, offers a full range of real estate
lending products including fixed and floating rate permanent and mini-permanent
mortgages and construction loans. Personal loans include installment loans and
lines of credit, home equity loans and a wide variety of home mortgage loans.
Commercial lending products provided by The PrivateBank (St. Louis) include
lines of credit for working capital, term loans for equipment and letters of
credit to support the commitments made by its clients. Non-credit products
include lock-box, cash concentration accounts, merchant credit card processing,
electronic funds transfer, and other cash management products. Individual
banking services include interest-bearing checking, money market deposit
accounts, certificates of deposit, ATM/debit cards and investment brokerage
accounts. The PrivateBank (St. Louis) also offers domestic and international
wire transfers and foreign currency exchange.
12
THE PRIVATEBANK (ST. LOUIS)
-----------------------------------
JUNE 30,
-----------------------------------
2004 2003
---------------- ----------------
(IN THOUSANDS)
Total gross loans.............. $171,246 $125,926
Total assets................... 239,921 177,068
Total deposits................. 170,131 143,767
Total borrowings............... 52,094 15,522
Total capital.................. 16,303 14,965
Net interest income............ 3,426 2,506
Non-interest income............ 1,225 1,816
Non-interest expense........... 2,721 2,686
Net income..................... 1,149 826
WEALTH MANAGEMENT
Wealth Management includes investment management, personal trust and
estate services, custodial services, retirement accounts and brokerage and
investment services. Investment management professionals work with wealth
management clients to define objectives, goals and strategies of the clients'
investment portfolios. Wealth Management personnel assist some trust clients
with the selection of an outside portfolio manager to direct account
investments. Trust and estate account administrators work with clients and their
attorneys to establish estate plans. Consistent with the Company's philosophy,
Wealth Management emphasizes a high level of personal service, including prompt
collection and reinvestment of interest and dividend income, weekly valuation,
tracking of tax information, customized reporting and ease of security
settlement. The minority interest expense related to Lodestar is included in
non-interest expense for this segment.
WEALTH MANAGEMENT
-----------------------------
JUNE 30,
-----------------------------
2004 2003
---------- -----------
(IN THOUSANDS)
Wealth Management assets under
management...................... $1,590,119 $1,264,955
Wealth Management fee revenue...... 4,087 3,065
Net interest income................ 818 618
Non-interest expense............... 3,678 3,222
Net income......................... 729 242
The following tables indicates the breakdown of our wealth management
assets under management at June 30, 2004 by account classification and related
gross revenue for the six months ended June 30, 2004 and June 30, 2003:
13
AT OR FOR THE SIX MONTHS
ENDED JUNE 30, 2004
----------------------------
MARKET
VALUE REVENUE
------------ ------------
ACCOUNT TYPE (IN THOUSANDS)
- -------------------------------------
Lodestar............................. $ 609,185 $1,807
Personal trust--managed.............. 330,616 1,053
Agency--managed...................... 241,800 720
Custody.............................. 409,084 445
Employee benefits--managed........... 63,031 62
---------- ------
Less trust assets managed by
Lodestar(1)....................... (63,597)
----------
Total............................. $1,590,119 $4,087
========== ======
(1) These assets are included in personal trust - managed balances, agency
- managed balances as well as Lodestar balances. The revenues related
to these assets are allocated between personal trust- managed, agency -
managed and Lodestar based on the services provided.
AT OR FOR THE SIX MONTHS
ENDED JUNE 30, 2004
----------------------------
MARKET
VALUE REVENUE
------------ ------------
ACCOUNT TYPE (IN THOUSANDS)
- -------------------------------
Lodestar....................... $ 538,370 $1,482
Personal trust--managed........ 55,012 266
Agency--managed................ 218,930 671
Custody........................ 377,115 539
Employee benefits--managed..... 75,528 107
---------- ------
Total....................... $1,264,955 $3,065
========== ======
HOLDING COMPANY ACTIVITIES
Holding Company Activities consist of parent company only matters. The
Holding Company's most significant assets are its net investments in its two
banking subsidiaries, The PrivateBank (Chicago) and The PrivateBank (St. Louis),
and a mortgage company subsidiary, The PrivateBank Mortgage Company, formerly
Corley Financial Corporation, acquired on June 15, 2004. During the first
quarter 2001, in connection with the issuance of $20.0 million of 9.50% trust
preferred securities, the Holding Company issued $20.0 million of subordinated
debentures which are accounted for as long-term debt and also qualify as Tier 1
and Tier 2 capital (see note 8). The Tier 1 qualifying amount is limited to 25%
of Tier 1 capital under Federal Reserve regulations. The excess amount qualifies
as Tier 2 capital. Holding Company Activities are reflected primarily by
interest expense on borrowings and operating expenses. Recurring holding company
operating expenses consist of compensation (amortization of restricted stock
awards, other salary expense) and miscellaneous professional fees. For the
second quarter 2004, The PrivateBank Mortgage Company results are included in
Holding Company Activities, since June 15, 2004, the date of acquisition.
14
HOLDING COMPANY ACTIVITIES
----------------------------
JUNE 30,
----------------------------
2004 2003
---------- ----------
(IN THOUSANDS)
Total assets................... $199,675 $156,196
Total borrowings............... 2,645 35,000
Long-term debt - trust
preferred securities........ 20,000 20,000
Total capital.................. 174,992 100,339
Interest expense............... 974 1,539
Non-interest income............ 100 101
Non-interest expense........... 2,151 1,429
Net loss....................... (1,858) (1,949)
The following is a summary of certain operating information for
reportable segments at or for the periods presented and the reported
consolidated balances (in millions):
AT OR FOR THE SIX THE THE HOLDING
MONTHS ENDED PRIVATEBANK PRIVATEBANK WEALTH COMPANY INTERSEGMENT
JUNE 30, 2004 (CHICAGO) (ST. LOUIS) MANAGEMENT ACTIVITIES ELIMINATIONS(2) CONSOLIDATED
- --------------------- ----------- ----------- ---------- ---------- --------------- ------------
Total assets......... $1,955.0 $239.9 $ - $199.7 $(195.4) $2,199.2
Total deposits....... 1,524.4 170.1 - - (21.1) 1,673.4
Total borrowings(1).. 254.3 52.1 - 22.6 (2.6) 326.4
Total loans.......... 1,239.3 171.2 - - (2.9) 1,407.6
Total capital........ 154.0 16.3 - 175.0 (171.6) 173.7
Net interest income.. 29.8 3.4 0.8 (0.8) 1.7 34.9
Non-interest income.. 2.8 1.2 4.1 0.1 (1.7) 6.5
Non-interest expense. 13.3 2.7 3.7 2.2 (0.1) 21.8
Minority interest
expense........... - - 0.1 - - 0.1
Net income........... 12.4 1.2 0.7 (1.9) - 12.4
Wealth Management
assets under
management........ - - 1,653.7 - (63.6) 1,590.1
AT OR FOR THE SIX THE THE HOLDING
MONTHS ENDED PRIVATEBANK PRIVATEBANK WEALTH COMPANY INTERSEGMENT
JUNE 30, 2003 (CHICAGO) (ST. LOUIS) MANAGEMENT ACTIVITIES ELIMINATIONS(2) CONSOLIDATED
- --------------------- ----------- ----------- ---------- ---------- --------------- ------------
Total assets......... $1,577.1 $177.1 $ - $156.2 $(150.7) $1,759.7
Total deposits....... 1,303.8 143.8 - - (2.0) 1,445.6
Total borrowings(1).. 119.9 15.5 - 55.0 - 190.4
Total loans.......... 942.7 125.9 - - (1.7) 1,066.9
Total capital........ 136.2 15.0 - 100.3 (151.2) 100.3
Net interest income.. 22.6 2.5 0.6 (1.5) 1.4 25.6
Non-interest income.. 4.1 1.8 3.1 0.1 (2.2) 6.9
Non-interest expense. 12.1 2.7 3.2 1.4 (0.2) 19.2
Minority interest
expense........... - - 0.1 - - 0.1
Net income........... 9.1 0.8 0.2 (1.9) - 8.2
Wealth Management
assets under
management........ - - 1,265.0 - - 1,265.0
<FN>
- ------------------
(1) Includes long-term debt-trust preferred securities for the Holding
Company Activities segment.
(2) The intersegment elimination for total loans reflects the exclusion of
unearned income for management reporting purposes. The intersegment
elimination for total capital reflects the elimination of the net
investment in The PrivateBank (Chicago), The PrivateBank (St. Louis)
and The PrivateBank Mortgage Company in consolidation. The intersegment
eliminations include adjustments necessary for each category to agree
with the related consolidated financial statements.
</FN>
15
The adjustments to total assets presented in the table above represent
the elimination of the net investment in banking subsidiaries in consolidation,
the elimination of the Company's cash that is maintained in a subsidiary bank
account, the elimination of fed funds purchased and sold between Chicago and St.
Louis, the reclassification of the unearned discount on loans, the
reclassification related to current and deferred taxes, the elimination of The
PrivateBank (Chicago) commercial loan and offsetting the warehouse line of
credit borrowing on The PrivateBank Mortgage Company's books and the
reclassification of loan fee income which is included in non-interest income for
segment reporting purposes as compared to interest income for consolidated
reporting purposes.
NOTE 6--ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying values and estimated fair values of financial instruments
as of June 30, 2004 have not materially changed on a relative basis from the
carrying values and estimated fair values of financial instruments disclosed as
of December 31, 2003.
NOTE 7--OTHER COMPREHENSIVE INCOME
Change in the fair value of securities available-for-sale is presented
on a net basis on the Consolidated Statement of Changes in Stockholders' Equity.
The following table discloses the changes in the components of other accumulated
comprehensive income for the six months ended June 30, 2004 and 2003 (in
thousands):
JUNE 30, 2004
---------------------------------------------
BEFORE TAX NET OF TAX
AMOUNT TAX EFFECT AMOUNT
---------- ------------ ----------
Change in unrealized gains on securities
available-for-sale........................ $11,245 $4,284 $6,961
Less: reclassification adjustment for gain
included in net income.................... 168 64 104
------- ------ ------
Change in net unrealized gains............... $11,077 $4,220 $6,857
======= ====== ======
JUNE 30, 2003
---------------------------------------------
BEFORE TAX NET OF TAX
AMOUNT TAX EFFECT AMOUNT
---------- ------------ ----------
Change in unrealized gains on securities
available-for-sale............................. $6,853 $2,330 $4,523
Less: reclassification adjustment for gain
included in net income......................... 2,255 767 1,488
------- ------ ------
Change in net unrealized gains.................... $4,598 $1,563 $3,035
======= ====== ======
NOTE 8--LONG TERM DEBT -- TRUST PREFERRED SECURITIES
On February 8, 2001, PrivateBancorp Capital Trust I, a Delaware
statutory trust and wholly owned finance subsidiary of the Company, issued
2,000,000 shares (including the underwriters' over-allotment) of 9.50% trust
preferred securities, which represent preferred undivided interests in the
assets of the trust. The sole assets of the trust are 9.50% junior subordinated
debentures issued by the Company with a maturity date of December 31, 2030.
16
Subject to certain limitations, the Company has the right to defer
payment of interest on the debentures at any time, or from time to time, for a
period not to exceed 20 consecutive quarters. The trust preferred securities are
subject to mandatory redemption, in whole or in part, upon repayment of the
debentures at maturity or their earlier redemption. At the option of the
Company, the debentures may be redeemed in whole or in part prior to maturity on
or after December 31, 2005, if certain conditions are met, and only after the
Company has obtained Federal Reserve approval, if then required under applicable
guidelines or regulations.
The Company has guaranteed the payment of distributions and payments
upon liquidation or redemption of the trust preferred securities, in each case
to the extent of funds held by the trust. The Company and the trust believe
that, taken together, the obligations of the Company under the guarantee, the
debentures and other related agreements provide, in the aggregate, a full,
irrevocable and unconditional guarantee, on a subordinated basis, of all of the
obligations of the trust under the trust preferred securities.
The aggregate principal amount of the trust preferred securities
outstanding is $20.0 million. As of June 30, 2004, the entire amount of the
preferred securities is eligible for treatment as Tier I capital as allowed by
the Federal Reserve. At June 30, 2004, the unamortized balance of the
underwriting commissions paid and offering expenses was $1.0 million and is
classified as part of other assets on the balance sheet. This amount is being
amortized on a straight-line basis until maturity at $9,764 per quarter. The
amortization is recognized as interest expense on the income statement. In the
event the Company exercises its right to redeem the securities prior to
maturity, any unamortized commissions would be expensed upon redemption.
NOTE 9--CAPITAL TRANSACTIONS
During the second quarter 2004, the Company declared and paid a $0.03
per share dividend, even with first quarter 2004 levels, and a 50% increase from
the fourth quarter 2003 dividend rate of $0.02 per share.
During the second quarter 2004, the Company repurchased 24,515 shares
of its common stock in connection with the satisfaction of a stock option
exercise and federal withholding tax requirements on the exercise of stock
options by a board member and the Chief Executive Officer of the Company.
On April 23, 2004, the Company announced a two-for-one split of its
common stock, which was effected in the form of a stock dividend. Stockholders
received one share for every one share of PrivateBancorp, Inc. common stock held
on the record date. The stock dividend was paid on May 31, 2004 to stockholders
of record as of the close of business on May 17, 2004.
NOTE 10--ACQUISITIONS
On June 15, 2004, the Company acquired Corley Financial Corporation, a
Chicago-based, mortgage-banking boutique that originated approximately $180.0
million in single-family residential loans in 2003. The PrivateBank (Chicago)
previously outsourced its processing of residential mortgage loans to Corley
Financial Corporation in a business relationship that was established over three
years ago. The Company acquired Corley in an effort to better serve clients and
lower mortgage origination costs, while adding highly experienced mortgage
lenders to client service teams. After the acquisition, the mortgage bank
operates as The PrivateBank Mortgage Company and is maintained as a separate
subsidiary of PrivateBancorp, Inc.
The consideration paid by the Company included cash of $475,000 and
32,000 shares of common stock valued at $872,640, for an aggregate purchase
price of $1.3 million before transaction costs. The value of the common stock
issued was determined based on the closing stock price of PrivateBancorp,
17
Inc.'s common stock on the date of acquisition. All assets and liabilities were
adjusted to fair value as of the effective date of the acquisition.
THE PRIVATEBANK MORTGAGE COMPANY
JUNE 15, 2004
The following table summarizes the estimated fair values of the assets
acquired and liabilities assumed at the date of acquisition:
AT JUNE 15, 2004 (IN 000'S)
---------------------------
Cash........................................ $ 187
Fixed assets................................ 8
Loans held for sale......................... 4,773
Other assets................................ 143
------
Total assets acquired ................. $5,111
Current liabilities ........................ $5,068
------
Total liabilities assumed ............. 5,068
Net assets acquired ........................ $ 43
======
The acquisition resulted in goodwill of $1.3 million. The goodwill will
not be amortized pursuant to the application of SFAS 142, but will be evaluated
annually for impairment. The entire amount of goodwill is expected to be
deductible for tax purposes.
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
PrivateBancorp was organized as a Delaware corporation in 1989 to serve
as the holding company for a Chicago-based de novo (start-up) bank. Our flagship
downtown Chicago location opened in 1991. We expanded to Wilmette in north
suburban Cook County in 1994 and the Oak Brook facility in west suburban DuPage
County was established in 1997. We established the St. Charles office in January
2000, in connection with our purchase of Towne Square Financial Corporation (a
company which was in the process of forming a de novo bank) on August 3, 1999.
On February 11, 2000, we consummated our acquisition of Johnson Bank Illinois
adding two additional locations in Lake Forest and Winnetka, Illinois. During
the second quarter 2000, we received regulatory approval to create a new banking
subsidiary and on June 23, 2000, PrivateBancorp capitalized The PrivateBank (St.
Louis). In May 2001, The PrivateBank (Chicago) opened a second branch in the Fox
Valley area in Geneva, Illinois. On July 22, 2004, the Company signed a
definitive lease agreement for the site of a new Chicago banking office in the
historic Palmolive Building at the corner of North Michigan Avenue and Walton
Place in Chicago's affluent Gold Coast neighborhood to open in the fall of 2004.
On April 21, 2004, the Company announced its intent to expand to the
southeastern Wisconsin market. The Company plans to open a new banking office to
operate as The PrivateBank (Wisconsin), which is expected to open for business
at an as of yet undisclosed downtown Milwaukee location by the first of the year
2005.
In December 2002, The PrivateBank (Chicago) acquired an 80% controlling
interest in Lodestar Investment Counsel, a Chicago-based investment adviser with
$609.2 million of assets under management at June 30, 2004. On June 15, 2004,
the Company acquired Corley Financial Corporation, a Chicago-based,
mortgage-banking boutique. After the acquisition, the mortgage bank operates as
The PrivateBank Mortgage Company and is maintained as a separate subsidiary of
PrivateBancorp, Inc.
For financial information regarding the Company's four separate lines
of business, The PrivateBank (Chicago), The PrivateBank (St. Louis), Wealth
Management and Holding Company Activities, see "Operating Segments Results"
beginning on page 29 and "Note 5 -- Operating Segments" to the unaudited
consolidated financial statements of the Company included on page 11.
The profitability of our operations depends on our net interest income,
provision for loan losses, non-interest income, and non-interest expense. Net
interest income is dependent on the amounts and yields of interest-earning
assets as compared to the amounts and rates on interest-bearing liabilities. Net
interest income is sensitive to changes in market rates of interest as well as
to the execution of our asset/liability management strategy. The provision for
loan losses is affected by changes in the loan portfolio, management's
assessment of the collectability of the loan portfolio, loss experience, as well
as economic and market factors.
Non-interest income consists primarily of net security gains and Wealth
Management fee income, and to a lesser extent, fees for ancillary banking
services. Non-interest income from fees and deposit service charges are below
peer group levels. This is largely the result of the profile of our typical
client. Our clients tend to have larger deposit account balances than customers
of traditional banks. Because average balances tend to be high, we do not earn
high service charge income typical of many retail banks.
Non-interest expenses are heavily influenced by the growth of operations.
Our growth directly affects the majority of our expense categories.
19
CRITICAL ACCOUNTING POLICIES
Generally accepted accounting principles are complex and require
management to apply significant judgment to various accounting, reporting and
disclosure matters. Management must use assumptions and estimates to apply these
principles where actual measurements are not possible or practical. Management's
Discussion and Analysis of Financial Condition and Results of Operations should
be read in conjunction with our unaudited consolidated financial statements
included herein. For a complete discussion of our significant accounting
policies, see the footnotes to our Consolidated Financial Statements included on
pages F-8 through F-14 in our Form 10-K for the fiscal year ended December 31,
2003. Below is a discussion of our critical accounting policies. These policies
are critical because they are highly dependent upon subjective or complex
judgments, assumptions and estimates. Changes in such estimates may have a
significant impact on the financial statements. Actual results could differ from
those estimates. Management has reviewed the application of these policies with
the Audit Committee of the Company's Board of Directors.
For PrivateBancorp, Inc., accounting policies that are viewed as
critical to us are those relating to estimates and judgments regarding the
determination of the adequacy of the allowance for loan losses and the
estimation of the valuation of goodwill and the useful lives applied to
intangible assets.
Allowance for Loan Losses
We maintain an allowance for loan losses at a level management believes is
sufficient to absorb credit losses inherent in our loan portfolio. The allowance
for loan losses represents our estimate of probable losses in the portfolio at
each balance sheet date and is based on a review of available and relevant
information. The allowance contains provisions for probable losses that have
been identified relating to specific borrowing relationships as well as probable
losses inherent in our loan portfolio and credit undertakings that are not
specifically identified. Our allowance for loan losses is reassessed monthly to
determine the appropriate level of the allowance. The amount of the allowance
for loan losses is determined based on a variety of factors, including
assessment of the credit risk of the loans in the portfolio, volume of loans in
the portfolio, delinquent loans, impaired loans, evaluation of current economic
conditions in the market area, actual charge-offs and recoveries during the
period and historical loss experience. The unallocated portion of the reserve
involves the exercise of judgment by management and reflects various
considerations, including management's view that the reserve should have a
margin that recognizes the imprecision inherent in the process of estimating
credit losses.
Management adjusts the allowance for loan losses by recording a provision
for loan losses in an amount sufficient to maintain the allowance at the level
determined appropriate. Loans are charged-off when deemed to be uncollectible by
management. We believe that the allowance for loan losses is adequate to provide
for estimated probable credit losses inherent in our loan portfolio. The
allowance for loan losses as a percentage of total loans was 1.23% as of June
30, 2004 compared to 1.22% as of June 30, 2003.
Goodwill and Intangible Assets
During 2001, The PrivateBank (Chicago) recorded approximately $12.2
million in goodwill in connection with the Johnson Bank Illinois acquisition.
During 2002, the Company recorded $8.4 million of goodwill and $2.5 million in
customer intangibles in connection with the acquisition of Lodestar. During the
second quarter 2004, the Company recorded $1.3 million of goodwill in connection
with the acquisition of Corley Financial. Intangible assets are amortized over
an estimated useful life of 15 years. Effective January 1, 2002, the Company
adopted FAS No. 142, which requires that goodwill and intangible assets that
have indefinite lives no longer be amortized but be reviewed for impairment
annually, or more frequently if certain indicators arise. Prior to the adoption
of FAS No. 142, goodwill was
20
being amortized using the straight-line method over a period of 15 years. The
Company did not incur any goodwill impairment in 2003 in adopting FAS 142. The
Company performs an impairment test of goodwill each year. Impairment losses on
recorded goodwill, if any, will be recorded as operating expenses.
Goodwill at June 30, 2004 was $20.5 million compared to $19.2 million
at June 30, 2003, an increase of $1.3 million, resulting from the acquisition of
Corley Financial. Amortization expense related to the Lodestar customer
intangible assets is recognized at approximately $168,000 each year until 2017.
RESULTS OF OPERATIONS -THREE AND SIX MONTHS
ENDED JUNE 30, 2004 AND 2003
NET INCOME
Net income for the second quarter ended June 30, 2004, was $6.5
million, up 40% compared to second quarter 2003 net income of $4.6 million.
Earnings per diluted share increased 11% to $0.31 in the second quarter 2004
compared to $0.28 per diluted share in the second quarter 2003. Net income for
the six months ended June 30, 2004, increased to $12.4 million, or $.60 per
diluted share, compared to $8.2 million, or $0.50 per diluted share, for the
same period last year, reflecting diluted earnings per share improvement of 20%.
The improvement in earnings per diluted share for the three and six
months ended June 30, 2004 as compared to the prior year period reflects a year
over year increase in net interest margin augmented by strong loan demand and
increases in wealth management, mortgage banking and other income. Non-interest
income was $3.6 million in the second quarter 2004, reflecting a decrease of
approximately $806,000 or 18% from the second quarter 2003. The decrease in fee
income was attributable to $1.2 million in securities losses compared to $2.3
million in securities gains in the prior year quarter. Securities losses were
more than offset by $1.3 million in trading gains from the fair market value
adjustment on a $25.0 million, 10-year treasury rate for 3-month LIBOR interest
rate swap and increases in wealth management fee revenue during the quarter.
During the six months ended June 30, 2004, the Company recognized securities
losses of $168,000, compared to gains of $2.3 million for the same period in
2003. Non-interest income for the six months ended June 30, 2004 reflects the
fair market value adjustment on the interest rate swap, which resulted in gains
of $259,000 during the six months ended June 30, 2004, versus losses of $1.3
million in the prior year period.
NET INTEREST INCOME
Net interest income is the difference between interest income and fees
on earning assets and interest expense on deposits and borrowings. Interest
income includes amortization of loan origination fees recorded from loans.
Interest expense includes amortization of prepaid fees on brokered deposits and
issuance costs of trust preferred securities. Net interest margin represents net
interest income on a tax equivalent basis as a percentage of average earning
assets during the period. Net interest margin reflects the spread between
average yields earned on interest earning assets and the average rates paid on
interest-bearing deposits and borrowings. The volume of non-interest-bearing
funds, largely comprised of demand deposits and capital, also affects the net
interest margin.
Net interest income was $17.3 million during the three months ended
June 30, 2004 compared to $12.6 million for the second quarter of 2003, an
increase of 38%, and a decrease of 1% compared to the first quarter 2004.
Average earning assets during the second quarter of 2004 were $2.1 billion,
compared to $1.6 billion in the prior year quarter, an increase of 32%, and an
increase of 7% since the first quarter 2004. Net interest margin (on a tax
equivalent basis) was 3.51% in the second quarter of 2004, up from 3.33% in the
prior year second quarter and down from 3.80% in the first quarter of 2004.
Compared to the first quarter 2004, the margin compression during the second
quarter of 2004 reflects a 19 basis point decrease in yields on average earning
assets and a 14 basis point increase in the costs of average interest-bearing
liabilities. The decrease in earning asset yields was primarily due to the
combined impact of lower yields on recently originated loans, a decrease in the
dividend paid on Federal
21
Home Loan Bank (Chicago) stock from 6.5% in the first quarter 2004 to 6.0% in
the second quarter 2004, and high levels of residential mortgage prepayments,
which depressed the yield on the Company's mortgage-backed securities portfolio.
The increase in cost of funds was primarily due to the combined impact of adding
approximately $36.0 million of long-term brokered deposits in the first quarter
2004 and early in the second quarter 2004 as well as the one-time cost of
approximately $170,000 associated with calling and refunding $25.0 million of
brokered deposits. For the third quarter 2004, the Company expects net interest
margin to stabilize given a likely increase in earning asset yields.
Net interest income on a tax equivalent basis was $37.0 million during
the six months ended June 30, 2004 compared to $27.0 million for the same period
in 2003, an increase of 37%. Net interest margin (on a tax equivalent basis) was
3.65% for the six months ended June 30, 2004, up from 3.49% in the prior year
period. The improvement in net interest margin during the six months ended June
30, 2004 as compared to the same period in 2003 was primarily attributable to a
reduction of 21 basis points in the rates paid on our interest bearing
liabilities, which more than offset the 14 basis point decline in the rates
earned on interest yielding assets. During 2004, increases in market rates of
interest have positively impacted yields on investment securities.
A changing interest rate environment has an effect on our net interest
margin. A large portion of our loan portfolio is based on the prime interest
rate and may reprice faster than our deposits and floating rate borrowings.
Longer-term liabilities are generally more expensive than shorter-term
liabilities given the upward slope of the yield curve. Alternatively, if market
interest rates decrease, we expect our net interest margin to experience
pressure. As discussed in the previous quarter, changing our focus to lengthen
borrowing terms given historically lower rates during 2003 and the first quarter
of 2004 has compressed net interest margin this quarter, but should have a
positive impact in future quarters if market interest rates continue to rise.
22
The following tables present a summary of our net interest income and
related net interest margin, calculated on a tax equivalent basis (dollars in
thousands):
THREE MONTHS ENDED JUNE 30,
-------------------------------------------------------------------------
2004 2003
--------------------------------- ----------------------------------
AVERAGE AVERAGE
BALANCE(1) INTEREST RATE BALANCE(1) INTEREST RATE
---------- -------- ------ ---------- -------- ------
Fed funds sold and other
short-term investments......... $ 1,944 $ 4 0.78% $ 9,765 $ 31 1.04%
Investment securities (taxable)... 489,759 5,289 4.29% 387,942 3,451 3.53%
Investment securities
(non-taxable) ................. 215,469 3,631 6.74% 140,002 2,439 6.97%
Loans, net of unearned
discount(2).................... 1,377,610 18,702 5.40% 1,047,043 15,208 5.78%
---------- ------- ---------- -------
Total earning assets.............. $2,084,782 $27,626 5.27% $1,584,752 $21,129 5.30%
========== ======= ========== =======
Interest-bearing deposits......... $1,474,100 $ 7,155 1.95% $1,287,331 $ 6,140 1.91%
Funds borrowed.................... 320,766 1,552 1.91% 157,485 1,204 3.02%
Trust preferred securities........ 20,000 485 9.70% 20,000 485 9.70%
---------- ------- ---------- -------
Total interest-bearing
liabilities.................... $1,814,865 9,192 2.03% $1,464,816 7,829 2.14%
========== ------- ========== -------
Tax equivalent net interest
income(3)...................... $18,434 $13,300
======= =======
Net interest spread(4)............ 3.24% 3.16%
Net interest margin(3)(5)......... 3.51% 3.33%
SIX MONTHS ENDED JUNE 30,
-------------------------------------------------------------------------
2004 2003
--------------------------------- ----------------------------------
AVERAGE AVERAGE
BALANCE(1) INTEREST RATE BALANCE(1) INTEREST RATE
---------- -------- ------ ---------- -------- ------
Fed funds sold and other
short-term investments......... $ 1,797 $ 10 1.12% $ 10,794 $ 56 1.03%
Investment securities (taxable)... 482,704 10,879 4.48% 369,815 7,243 3.90%
Investment securities(non-taxable) 207,059 6,987 6.75% 134,502 4,721 7.02%
Loans, net of unearned
discount(2).................... 1,320,804 36,382 5.48% 1,023,807 30,375 5.93%
---------- ------- ---------- -------
Total earning assets.............. $2,012,364 $54,258 5.37% $1,538,918 $42,395 5.51%
========== ======= ========== =======
Interest-bearing deposits......... $1,428,509 $13,248 1.86% $1,234,814 $11,917 1.95%
Funds borrowed.................... 313,348 3,038 1.92% 174,780 2,516 2.86%
Trust preferred securities........ 20,000 970 9.70% 20,000 970 9.70%
---------- ------- ---------- -------
Total interest-bearing liabilities $1,761,857 $17,256 1.96% $1,429,594 $15,403 2.17%
========== ------- ========== -------
Tax equivalent net interest
income(3)...................... $37,002 $26,992
======= =======
Net interest spread(4)............ 3.41% 3.34%
Net interest margin(5)(3)......... 3.65% 3.49%
<FN>
- ------------------
(1) Average balances were generally computed using daily balances.
(2) Nonaccrual loans are included in the average balances and do not have a
material effect on the average yield. Interest due on non-accruing
loans was not material for the periods presented.
(3) We adjust GAAP reported net interest income by the tax equivalent
adjustment amount to account for the tax attributes on federally tax
exempt municipal securities. The total tax equivalent adjustment
reflected in the above table is $1.1 million and $742,000 in the second
quarters of 2004 and 2003, respectively. The total tax equivalent
adjustment reflected in the above table is $2.1 million and $1.4
million for the six months ended June 30, 2004 and June 30, 2003,
respectively. For GAAP purposes, tax benefits associated with federally
tax-exempt municipal securities are reflected in income tax expense.
The following table reconciles reported net interest income to net
interest income on a tax equivalent basis for the periods presented:
</FN>
23
RECONCILIATION OF QUARTER NET INTEREST INCOME TO QUARTER NET INTEREST
INCOME ON A TAX EQUIVALENT BASIS
2Q04 2Q03
------- -------
Net interest income............................. $17,334 $12,558
Tax equivalent adjustment to net
interest income.............................. 1,100 742
------- -------
Net interest income, tax equivalent basis....... $18,434 $13,300
======= =======
RECONCILIATION OF YEAR-TO-DATE NET INTEREST INCOME TO YEAR-TO-DATE NET INTEREST
INCOME ON A TAX EQUIVALENT BASIS
6/30/04 6/30/03
------- -------
Net interest income............................. $34,885 $25,555
Tax equivalent adjustment to net
interest income.............................. 2,117 1,437
------- -------
Net interest income, tax equivalent basis....... $37,002 $26,992
======= =======
(4) Yield on average interest-earning assets less rate on average
interest-bearing liabilities.
(5) Net interest income, on a tax-equivalent basis, divided by average
interest-earning assets.
The following tables show the dollar amount of changes in interest
income (tax equivalent) and interest expense by major categories of
interest-earning assets and interest-bearing liabilities attributable to changes
in volume or rate, or a mix of both, for the periods indicated. Volume variances
are computed using the change in volume multiplied by the previous period's
rate. Rate variances are computed using the changes in rate multiplied by the
previous period's volume.
24
THREE MONTHS ENDED JUNE 30, 2004
COMPARED TO THREE MONTHS ENDED JUNE 30, 2003
CHANGE CHANGE
CHANGE DUE DUE TO DUE TO TOTAL
TO RATE VOLUME MIX CHANGE
---------- ------ ------- ------
(DOLLARS IN THOUSANDS)
Interest income/expense from:
Fed funds sold and other short-term investments... $ (12) $ (25) $ 10 $ (27)
Investment securities (taxable)................... 736 896 206 1,838
Investment securities (non-taxable)(1)............ (79) 1,311 (40) 1,192
Loans, net of unearned discount................... (987) 4,763 (282) 3,494
----- ------- ------ -------
Total tax equivalent interest income(1)........ $(342) $ 6,945 $ (106) $ 6,497
===== ======= ====== =======
Interest-bearing deposits......................... $ 110 $ 891 $ 14 $ 1,015
Funds borrowed.................................... (436) 1,231 (447) 348
Trust preferred securities........................ -- -- -- --
----- ------- ------ -------
Total interest expense......................... $(326) $ 2,122 $ (433) $ 1,363
----- ------- ------ -------
Net tax equivalent interest income(1)............. $ (16) $ 4,823 327 $ 5,134
===== ======= ====== =======
SIX MONTHS ENDED JUNE 30, 2004
COMPARED TO SIX MONTHS ENDED JUNE 30, 2003
CHANGE CHANGE
CHANGE DUE DUE TO DUE TO TOTAL
TO RATE VOLUME MIX CHANGE
---------- ------ ------- ------
(DOLLARS IN THOUSANDS)
Interest income/expense from:
Fed funds sold and other short-term
investments............................. $ 5 $ (46) $ (5) $ (46)
Investment securities (taxable)............. 1,052 2,186 398 3,636
Investment securities (non-taxable)(1)...... (182) 2,526 (78) 2,266
Loans, net of unearned discount............. (2,312) 8,739 (420) 6,007
------- ------- ------ -------
Total tax equivalent interest income(1).. $(1,437) $13,405 $ (104) $11,863
------- ------- ------ -------
Interest-bearing deposits................... $ (527) $ 1,869 $ (11) $ 1,331
Funds borrowed.............................. (819) 1,967 (626) 522
Trust preferred securities.................. -- -- -- --
------- ------- ------ -------
Total interest expense................... $(1,346) $ 3,836 $ (637) $ 1,853
------- ------- ------ -------
Net tax equivalent interest income(1)....... $ (91) $ 9,569 $ 532 $10,010
======= ======= ====== =======
<FN>
- ------------------
(1) Interest income on tax-advantaged investment securities reflects a tax
equivalent adjustment based on a marginal federal corporate tax rate of
34%. The total tax equivalent adjustment reflected in the above table is
$1.1 million and $742,000 in the second quarters of 2004 and 2003,
respectively. The total tax equivalent adjustment reflected in the above
table is $2.1 million and $1.4 million for the six months ended June 30,
2004 and June 30, 2003, respectively.
</FN>
PROVISION FOR LOAN LOSSES
We made a provision for loan losses of $724,000 for the quarter ended
June 30, 2004 compared to $730,000 for the comparable period in 2003. Net
recoveries totaled $51,000 for the quarter ended June 30, 2004 versus net
charge-offs of $182,000 for the second quarter of 2003 and net recoveries of
$103,000 for the quarter ended March 31, 2004. For the six months ended June 30,
2004, the provision for loan losses was $2.1 million compared to $1.7 million in
the prior year period.
25
Our allowance for probable loan losses is reassessed monthly to determine
the appropriate level of the reserve. Our analysis is influenced by the
following factors: the volume and quality of loans and commitments in the
portfolio, loss experience, and economic conditions. A discussion of the
allowance for loan losses and the factors on which provisions are based begins
on page 31.
NON-INTEREST INCOME
Non-interest income was $3.6 million in the second quarter of 2004,
reflecting a decrease of approximately $806,000 or 18% from the second quarter
of 2003. The decrease in fee income was primarily attributable to $1.2 million
in securities losses compared to $2.3 million in securities gains in the prior
year quarter. Securities losses were more than offset by $1.3 million in trading
gains from the fair market value adjustment on a $25.0 million 10-year treasury
rate for 3-month LIBOR interest rate swap and increases in wealth management fee
revenue during the quarter. During the six months ended June 30, 2004, the
Company recognized securities losses of $168,000, compared to gains of $2.3
million for the same period in 2003. Non-interest income for the six months
ended June 30, 2004 reflects the fair market value adjustment on the interest
rate swap, which resulted in gains of $259,000 during the six months ended June
30, 2004, versus losses of $1.3 million in the prior year period.
The following table presents the breakdown of wealth management,
mortgage banking and other income for the periods presented:
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------- ---------------------
JUNE 30, JUNE 30,
-------------------- ---------------------
2004 2003 2004 2003
------ ------ ------ ------
Wealth management fee revenue.......... $2,129 $1,580 $4,087 $3,065
Residential real estate secondary
market fees......................... 782 1,037 1,246 1,818
Banking and other services............. 436 415 870 723
Bank owned life insurance.............. 125 149 249 276
------ ------ ------ ------
Total wealth management, mortgage
banking and other income......... $3,472 $3,181 $6,452 $5,882
====== ====== ====== ======
Total wealth management assets under management were $1.6 billion at
June 30, 2004 compared to $1.3 billion at June 30, 2003, and up $95.2 million
from $1.5 billion at December 31, 2003. Of these amounts, trust services assets
under management were $980.9 million and Lodestar assets under management were
$609.2 million at June 30, 2004. Excluded from the total wealth management
assets under management are $63.6 million of trust services assets that are
managed by Lodestar. At March 31, 2004, trust services managed $974.4 million of
assets, Lodestar managed $601.8 million of assets, and $56.6 million of assets
managed by Lodestar were excluded from the total wealth management assets under
management. Growth in assets under management during the quarter reflects the
impact of net new business generated.
Growth in wealth management fee income contributed to the expansion in
non-interest income during the quarter. Wealth management fee income totaled
$2.1 million for the second quarter of 2004, an increase of approximately
$550,000 from the second quarter of 2003 and an increase of $172,000 from the
first quarter of 2004. Of the $2.1 million, approximately $534,000 was revenue
generated from wealth management services provided to those clients where a
third-party investment manager is utilized. For the three months ended June 30,
2003, $1.6 million of wealth management fee revenue was generated; of this
amount approximately $477,000 was third-party investment manager revenue. A
26
portion of revenue is used to pay these third-party investment managers and the
remaining amount of fees collected are utilized to cover costs associated with
administering other aspects of the wealth management services that we provide to
clients. The fees paid to third-party investment managers are included in the
professional fees category of non-interest expense. For the six months ended
June 30, 2004, wealth management fee income totaled $4.1, compared to $3.1
million in the prior year period.
The increase in wealth management fee revenue over the prior year
period reflects a favorable shift in the mix of accounts towards higher fee
structures, the addition of new business and equity market improvements
experienced during 2003.
Sales of residential real estate loans generated $782,000 of income
during the second quarter of 2004 compared to $1.0 million during the prior year
quarter primarily due to a lower volume of loans sold as a result of relatively
decreased demand for residential real estate loans. Late in the first quarter
2004, when market interest rates declined, we experienced a slight increase in
the demand for residential real estate loans. The majority of these loans closed
in the second quarter with a resulting benefit to residential loan fees. For the
six months ended June 30, 2004, sales of newly originated residential real
estate loans generated $1.2 million of income as compared to $1.8 million in the
year earlier period, a decrease of 32%.
During the second quarter of 2004, we recognized income of $125,000
related to the increased cash surrender value of a bank owned life insurance
(BOLI) policy that was entered into in the fourth quarter of 2001 as compared to
relatively similar levels of income in the second quarter of 2003. This policy
covers certain higher-level employees who are deemed to be significant
contributors to the Company. All employees included in this policy are aware and
have consented to the coverage. The cash surrender value of BOLI at June 30,
2004 was $11.5 million and is included in other assets on the balance sheet.
Early in the third quarter 2004, the Company purchased an additional $22.0
million in BOLI, which should result in higher BOLI revenue in the third quarter
of 2004.
Included in non-interest income for the 2004 period are trading losses
recorded to reflect the fair market value adjustment on an interest rate swap
used to economically hedge a portion of the Company's investment in long-term
municipal bonds. The change in the fair market value of the swap is recognized
in earnings and resulted in a gain for the three months ended June 30, 2004
because of the overall increase in market rates of interest during the period.
For the three months ended June 30, 2004, the trading gain totaled $1.3 million
compared to a trading loss of $1.1 million during the second quarter of 2003.
Securities losses for the three months ended June 30, 2004 were $1.2 million
compared to gains of $2.3 million in the prior year quarter. For the six months
ended June 30, 2004, trading gains were $259,000 compared to losses of $1.3
million in the prior year period. Securities losses were $168,000 for the first
six months of 2004, compared to gains of $2.3 million in the prior year period.
27
NON-INTEREST EXPENSE
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------ -------------------------
JUNE 30, JUNE 30,
------------------------ -------------------------
2004 2003 2004 2003
----------- ------------ ------------ ------------
(IN THOUSANDS) (IN THOUSANDS)
Salaries and employee benefits.......... $6,057 $5,070 $12,092 $ 9,848
Occupancy............................... 1,350 1,270 2,710 2,689
Professional fees....................... 1,451 1,069 2,565 2,353
Marketing............................... 703 509 1,198 995
Data processing......................... 513 368 960 761
Postage, telephone and delivery......... 227 212 456 424
Office supplies and printing............ 127 137 262 297
Insurance............................... 207 146 422 314
Amortization of intangibles............. 42 42 84 84
Other expense........................... 543 933 1,010 1,410
------- ------ ------- -------
Total non-interest expense.............. $11,220 $9,756 $21,759 $19,175
======= ====== ======= =======
Non-interest expense increased to $11.2 million in the second quarter
of 2004 from $9.8 million in the second quarter of 2003, an increase of 15%. For
the six months ended June 30, 2003, non-interest expense increased 13% to $21.8
million from $19.2 million in the prior period.
The increase in non-interest expense between the periods is
attributable primarily to increases in personnel costs associated with our
growing client service team, including the addition of several managing
directors during 2004 and the addition of Corley Financial Corporation
employees. Our efficiency ratio (non-interest expense divided by the sum of net
interest income on a tax equivalent basis plus non-interest income) improved to
50.8% for the second quarter 2004 as compared to 55.0% for the second quarter
2003. On a tax-equivalent basis, this ratio indicates that in the second quarter
of 2004, we spent 50.9 cents to generate each dollar of revenue, compared to
55.0 cents in the second quarter of 2003. Our efficiency ratio improved to 50.0%
for the six months ended June 30, 2004 as compared to 56.7% for the same period
in 2003. Please refer to footnote 3 on page 24 for a reconciliation of net
interest income to net interest income on a tax equivalent basis.
Salaries and benefits increased to $6.1 million, or 19% during the
second quarter 2004 as compared to the year ago quarter, reflecting the
increased level of full-time equivalent employees to 252 people at June 30, 2004
from 194 people at June 30, 2003. Salaries and benefits increased to $12.1
million, or 23% during the six months ended June 30, 2004 as compared to the
year ago period. The increase is due primarily to overall growth in the
organization and the addition of two Managing Directors and 11 employees as a
result of the acquisition of Corley Financial in June of 2004.
Occupancy expense increased to $1.4 million during the second quarter
2004, reflecting an increase of 6% over the prior year quarter. Occupancy
expense was $2.7 million during the six months ended June 30, 2004, even with
the prior year period. We expect occupancy expense to increase in future
quarters with the additional floor space that is being leased in our downtown
Chicago location as well as the additional space being leased for the Gold Coast
office to be opened in the fall of 2004.
Professional fees, which include legal, accounting, consulting,
information systems consulting services and investment management fees,
increased to $1.5 million during the second quarter of 2004, reflecting an
increase of 36% over the prior year quarter, primarily due to expenses
associated with the documentation and testing of internal controls which has
resulted as a result of the requirements of the Sarbanes-Oxley Act. During 2004,
we expect to spend approximately $250,000 in professional fees and expenses
associated with the implementation of these requirements. Professional fees
increased to $2.6 million, or 9%, during the six months ended June 30, 2004,
compared to the prior year period.
28
Marketing expense increased 38% to $703,000 during the second quarter 2004 over
the prior year quarter and 20% to $1.2 million for the six months ended June 30,
2004 due to the growth of the organization and increased demands for marketing
materials and events.
Insurance expense increased 42% during the second quarter 2004 over the
prior year quarter and 34% for the six months ended June 30, 2004 due to the
increased cost of insurance in the marketplace, and the renewal of our annual
insurance coverage.
Other non-interest expense for the second quarter 2004 decreased by 42%
as compared to the prior year quarter. In April 2003, The PrivateBank (Chicago)
suffered a potential loss of $400,000 in a check fraud scheme involving a new
account deposit. On June 27, 2003, the Company received a letter from its
insurance carrier declining coverage for the loss. As a result, the Company
recorded a second quarter 2003 charge of $400,000, which accounted for a
significant portion of the increase in other non-interest expense in the second
quarter of 2003. The Company's claim against the insurance carrier was denied in
May of 2004.
During the first six months of 2004, we amortized $84,000 in intangible
assets related to our acquisition of a controlling interest in Lodestar,
compared to a similar amount in 2003.
MINORITY INTEREST EXPENSE
On December 30, 2002, The PrivateBank (Chicago) acquired an 80%
controlling interest in Lodestar Investment Counsel LLC ("Lodestar"). The
Company records its 20% noncontrolling interest in Lodestar related to
Lodestar's results or operations, in minority interest expense on the
consolidated statement of income. For the quarter ended June 30, 2004, we
recorded approximately $65,000 of minority interest expense.
INCOME TAXES
The following table shows our income before income taxes, applicable
income taxes and effective tax rate for the six months ended June 30, 2004 and
2003, respectively (in thousands):
SIX MONTHS ENDED
JUNE 30,
------------------------
2004 2003
-------- --------
Income before taxes.......... $17,487 $11,465
Income tax provision......... 5,081 3,249
Effective tax rate........... 29.1% 28.3%
The effective income tax rate varies from statutory rates principally
due to certain interest income, which is tax-exempt for federal or state
purposes, and certain expenses, which are disallowed for tax purposes. The
higher effective tax rate for the six months ended June 30, 2004 as compared to
the prior year period reflects growth in pretax income of 53% that has slightly
outpaced the growth on our federally tax-exempt municipal bonds income.
Federally tax-exempt municipal bonds increased to $235.5 million as of June 30,
2004, a 51% increase from $156.2 million at June 30, 2003.
OPERATING SEGMENTS RESULTS
As described in Note 5 to the consolidated financial statements
included in this report, the Company's operations consist of four primary
business segments: The PrivateBank (Chicago), The PrivateBank (St. Louis),
Wealth Management and Holding Company Activities.
The profitability of The PrivateBank (Chicago) is primarily dependent
on the net interest income, provision for loan losses, non-interest income and
non-interest expense. Net income for The PrivateBank (Chicago) for the six
months ended June 30, 2004 increased 36% to $12.4 million from $9.1 million for
the six months ended June 30, 2003. The growth in net income for the period
resulted from improvements in net interest income, which was driven by increases
in loans and investments. The
29
improvement in net interest income and non-interest income for the six months
ended June 30, 2004 more than offset increases in operating expenses associated
with continued growth of The PrivateBank (Chicago). Net interest income for The
PrivateBank (Chicago) for the six months ended June 30, 2004 increased to $29.8
million from $22.6 million, or 32%, primarily due to growth in earning assets.
Total loans at The PrivateBank (Chicago) increased by 31%, or $296.6
million, to $1.2 billion at June 30, 2004 as compared to total loans of $942.7
million at June 30, 2003. The majority of the loan growth for the six months
ended June 30, 2004 occurred in the commercial and industrial loan category.
Total deposits increased by 17% to $1.5 billion at June 30, 2004, from $1.3
billion at June 30, 2003. Growth in non-interest-bearing deposits, savings
deposits and money market deposits accounted for the majority of the deposit
growth.
Net income for The PrivateBank (St. Louis) for the six months ended
June 30, 2004 increased to $1.1 million as compared to $826,000 in the prior
year period. This growth in net income resulted from increases in net interest
income and non-interest income, which more than offset increases in operating
expenses. Net interest income for The PrivateBank (St. Louis) for the six months
ended June 30, 2004 increased to $3.4 million from $2.5 million in the prior
year period, an increase of 37%, primarily due to growth in earning assets.
Total loans at The PrivateBank (St. Louis) increased 36% to $171.2
million at June 30, 2004 from $125.9 million at June 30, 2003, due primarily to
growth in commercial real estate and commercial loans categories. Construction
loans also contributed to the increase in loans, but to a lesser extent. Total
deposits increased by $26.3 million to $170.1 million at June 30, 2004 from
$143.8 million at June 30, 2003. The majority of the deposit growth at The
PrivateBank (St. Louis) was due to increased money market, jumbo certificates of
deposit and non-interest bearing deposits during the six months ended June 30,
2004 as compared to the prior year period. Brokered deposits were $49.2 million
at June 30, 2004, an increase of $4.9 million since June 30, 2003.
Wealth management includes investment management, personal trust and
estate services, custodial services, retirement accounts and brokerage and
investment services. Wealth management assets under management increased by
$388.8 million (including assets managed by Lodestar of $63.6 million) to $1.6
billion at June 30, 2004, as compared to $1.3 billion at June 30, 2003, due
primarily to the improvement in the equity markets and increases in net new
business. Wealth management fee revenue was $4.1 million for the six months
ended June 30, 2004, compared to $3.1 million for the six months ended June 30,
2003. Net income for the six months ended June 30, 2004 for our Wealth
Management segment was $729,000 as compared to $242,000 for the six months ended
June 30, 2003.
Holding Company Activities consist of parent company only matters. The
Holding Company's most significant assets are its net investments in its two
banking subsidiaries, The PrivateBank (Chicago) and The PrivateBank (St. Louis),
and its mortgage banking subsidiary, The PrivateBank Mortgage Company, acquired
on June 15, 2004. Holding Company Activities are reflected primarily by interest
expense on borrowings and operating expenses of the parent company. Recurring
holding company operating expenses consist primarily of compensation
(amortization of restricted stock awards, other salary expense) and
miscellaneous professional fees.
The Holding Company Activities segment, which includes the results of
The PrivateBank Mortgage Company, reported a net loss of $1.9 million for the
six months ended June 30, 2004 as compared to a net loss of $2.0 million for the
six months ended June 30, 2003. The slight decrease in the amount of the net
loss reported for 2004 as compared to prior year period reflects the decrease in
the amount of borrowings recorded at the Holding Company Activities segment.
During the third quarter of 2003, the Company repaid a $30.0 million revolving
line of credit and a $5.0 million subordinated note. The reduced level of
borrowings has reduced the interest expense recognized at the Holding Company
Activities segment. Total debt outstanding, which included trust preferred
securities, at the Holding
30
Company at June 30, 2004, was $22.6 million, compared to total debt outstanding
of $55.0 million at June 30, 2003.
FINANCIAL CONDITION
TOTAL ASSETS
Total assets increased to $2.2 billion at June 30, 2004, an increase of
$214.2 million, or 11% over total assets of $2.0 billion at December 31, 2003,
and an increase of $439.5 million, or 25% over $1.8 billion of total assets at
June 30, 2003. The balance sheet growth during the six months ended June 30,
2004 was accomplished mainly through loan growth throughout the Company and
growth in the investment securities portfolio. The growth in assets was funded
primarily through increases in FHLB advances, and core deposit growth, including
savings, money market, and non-interest bearing demand deposits.
LOANS
Total loans increased to $1.4 billion, an increase of $182.9 million,
or 15%, from $1.2 billion at December 31, 2003 and an increase of $340.7
million, or 32%, from $1.1 billion at June 30, 2003.
Loan growth since December 31, 2003 has occurred primarily in the
commercial real estate, commercial and construction loan categories. The
PrivateBank (St. Louis) had loans outstanding of $171.2 million as of June 30,
2004, which reflects growth of $19.7 million, or 13%, since December 31, 2003.
The remaining loan growth of $163.2 million (excluding intercompany
eliminations) during the first six months of 2004 was generated by The
PrivateBank (Chicago). All of The PrivateBank (Chicago) offices posted strong
gains in loan volume throughout the period. Loan volume at The PrivateBank
(Chicago) offices increased 16% at June 30, 2004 as compared to December 31,
2003 loan levels.
The following table sets forth the composition of our loan portfolio
net of unearned discount by category (in thousands) at the following dates:
JUNE 30, DECEMBER 31, JUNE 30,
2004 2003 2003
----------- ------------ -----------
LOANS
Commercial real estate............. $ 711,097 $ 639,296 $ 524,208
Commercial......................... 224,143 181,062 162,235
Residential real estate............ 83,434 69,541 70,858
Personal(1)........................ 72,302 77,154 63,047
Home Equity........................ 109,756 94,726 89,457
Construction....................... 206,854 162,878 157,114
---------- ---------- ----------
Total loans, net of unearned
discount..................... $1,407,586 $1,224,657 $1,066,919
========== ========== ==========
- ------------------
(1) Includes overdraft lines.
ALLOWANCE FOR LOAN LOSSES
Loan quality is continually monitored by management and reviewed by the
loan committees of the boards of directors of the banks on a monthly basis. The
amount of additions to the allowance for loan losses, which is charged to
earnings through the provision for loan losses, is determined based on a variety
of factors, including assessment of the credit risk of the portfolio, delinquent
loans, evaluation of current economic conditions in the market area, actual
charge-offs during the year and historical loss experience. The unallocated
portion of the reserve involves the exercise of judgment by management and
reflects various considerations, including management's view that the reserve
should have a margin that recognizes the imprecision inherent in the process of
estimating credit losses.
31
We maintain an allowance for loan losses sufficient to absorb credit
losses inherent in our loan portfolio. The allowance for loan losses represents
our estimate of probable losses in the portfolio at each balance sheet date and
is supported by all available and relevant information. The allowance contains
provisions for probable losses that have been identified relating to specific
borrowing relationships, as well as probable losses inherent in the loan
portfolio and credit undertakings that are not specifically identified.
Management's application of the methodology for determining the allowance for
loan losses resulted in an allowance for loan losses of $17.3 million at June
30, 2004 compared with $15.1 million at December 31, 2003, primarily reflecting
growth in the loan portfolio during the first six months of 2004. We believe
that the allowance for loan losses is adequate to provide for estimated probable
credit losses inherent in our loan portfolio.
The allowance for loan losses as a percentage of total loans was 1.23%
at June 30, 2004, 1.23% at December 31, 2003 and 1.22% at June 30, 2003. Net
recoveries totaled $154,180 for the six months ended June 30, 2004 versus net
charge-offs of $252,000 in the year earlier period. The provision for loan
losses was $2.1 million for the six months ended June 30, 2004, versus $1.7
million for the six months ended June 30, 2003.
Following is a summary of changes in the allowance for loan losses for
the six months ended June 30, 2004 and 2003 (in thousands):
2004 2003
-------- --------
Balance, January 1........................... $15,100 $11,585
Provisions charged to earnings............... 2,050 1,686
Loans charged-off, net of recoveries......... 154 (252)
------- -------
Balance, June 30............................. $17,304 $13,019
======= =======
Under our methodology, the allowance for loan losses is comprised of
the following components:
SPECIFIC COMPONENT OF THE RESERVE
The specific component of the reserve is determined on a loan-by-loan
basis as part of a regular review of our loan portfolio. The Company utilizes a
loan rating system to assist in developing an internal problem loan
identification system ("Watch List") as a means for identifying and reporting
non-performing and potential problem loans. These loans are allocated
specifically identified reserves based on the loan ratings assigned to
individual loans. The specific reserve is based on a loan's current book value
compared to the present value of its projected future cash flows, collateral
value or market value, as is relevant for the particular loan.
The portion of the provision related to the specific component of the
reserve was approximately $285,000 during the first six months of 2004 resulting
in an increase in this component of approximately $439,000 after giving effect
to $154,000 in recoveries during the period. The specific component of the
reserve consists of individual credit relationships that have been allocated
specifically identified reserves based on the loan ratings assigned to
individual loans and other extensions of credit.
ALLOCATED INHERENT COMPONENT OF THE RESERVE
The allocated portion of the inherent component of the reserve is based
on management's review of historical and industry charge-off experience as well
as its judgment regarding loans in each loan category over a period of time that
management determines is adequate to reflect longer-term economic trends. Loss
factors are evaluated by management and adjusted based on current facts and
circumstances. Loss factor adjustments reflect management's assessment of the
credit risk inherent in each loan category.
32
The portion of the provision related to the allocated inherent component
of the reserve was $2.1 million during the first six months of 2004. The
increase in the allocated portion of the reserve reflects a significant
migration of loans to slightly higher risk ratings as well as the increase in
volume in our commercial real estate loan portfolio and construction loan
portfolio. Loss factors for the construction and commercial real estate loan
portfolios were also increased to reflect management's evaluation of the current
economic conditions and its impact on these sectors of the portfolio. Management
has identified a weakening of credit quality of certain borrowers as reflected
by risk rating downgrades in 2004. Management has noticed lower sales, decreased
profitability and lower cash flows within its client base. These trends led to
the increased loss factors noted above. The increase in this component of the
reserve was partially offset by a decline in the impact of residential real
estate and home equity loans, resulting from a decrease in their respective loss
factors. Loss factors applied to residential real estate and home equity loans
were decreased or unchanged based on management's assessment of our historical
loss experience coupled with the quality of the underlying collateral securing
the residential real estate and home equity loan portfolios.
UNALLOCATED INHERENT COMPONENTS OF THE RESERVE
The unallocated portion of the inherent component of the reserve is based
on management's review of other factors affecting the determination of probable
losses inherent in the portfolio, which are not necessarily captured by the
application of loss factors. This portion of the reserve analysis involves the
exercise of judgment and reflects consideration such as management's view that
the reserve should have a margin that recognizes the imprecision inherent in the
process of estimating credit losses.
The portion of the provision related to the unallocated inherent component
of the reserve decreased by $327,000 for the first six months of 2004. The
decrease reflects our view that the inherent losses related to certain factors,
such as general economic and business conditions and the possible imprecision
due to changes in the portfolio mix, which we considered in our evaluation of
the unallocated allowance at December 31, 2003 are now recognized at June 30,
2004 in the allocated allowance through increased specific reserves or in the
higher loss factors utilized in determining the risk allocated allowance. The
growth and complexity of the loan portfolio exposes us to larger individual
charge-offs.
33
NONPERFORMING LOANS
The following table classifies our non-performing loans as of the dates
shown:
6/30/04 3/31/04 12/31/03 9/30/03 6/30/03
--------- --------- -------- --------- ---------
(DOLLARS IN THOUSANDS)
Nonaccrual loans...................... $151 $131 $ 36 $ 517 $ 889
Loans past due 90 days or more........ 644 715 1,088 1,401 1,849
---- ---- ------ ------ ------
Total nonperforming loans.......... 795 846 1,124 1,918 2,738
---- ---- ------ ------ ------
Total nonperforming assets......... $795 $846 $1,124 $1,918 $2,738
==== ==== ====== ====== ======
Total nonaccrual loans to
total loans........................ 0.01% 0.01% 0.00% 0.05% 0.08%
Total nonperforming loans to total
loans.............................. 0.06% 0.06% 0.09% 0.17% 0.26%
Total nonperforming assets to total
assets............................. 0.04% 0.04% 0.06% 0.10% 0.16%
Nonperforming loans include nonaccrual loans and accruing loans, which
are 90 days or more delinquent. Loans in this category include those with
characteristics such as past maturity more than 90 days, those that have recent
adverse operating cash flow or balance sheet trends, or loans that have general
risk characteristics that management believes might jeopardize the future timely
collection of principal and interest payments. The balance in this category at
any reporting period can fluctuate widely based on the timing of cash
collections, renegotiations and renewals.
Nonaccrual loans were $151,000 at June 30, 2004 as compared to $36,000
at December 31, 2003 and $889,000 at June 30, 2003. Nonaccrual loans increased
by $115,000 since December 31, 2003. Loans delinquent over 90 days decreased by
$444,000 since December 31, 2003 to $644,000.
INVESTMENT SECURITIES
The amortized cost and the estimated fair value of securities at June
30, 2004 and December 31, 2003, were as follows (in thousands):
INVESTMENT SECURITIES -- AVAILABLE-FOR-SALE
-------------------------------------------------------------
JUNE 30, 2004
-------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
----------- ---------- ---------- ----------
U.S. government agency mortgage
backed securities and
collateralized mortgage
obligations........................... $263,195 $3,906 $(2,530) $264,571
Corporate collateralized mortgage
obligations........................... 3,594 -- (1) 3,593
Tax exempt municipal securities.......... 235,501 4,769 (2,547) 237,723
Taxable municipal securities............. 3,855 19 -- 3,874
Federal Home Loan Bank stock............. 208,097 -- -- 208,097
Other.................................... 4,405 332 (13) 4,724
-------- ------ ------- --------
Total.................................... $718,647 $9,026 $(5,091) $722,582
======== ====== ======= ========
34
INVESTMENT SECURITIES -- AVAILABLE-FOR-SALE
-------------------------------------------------------------
DECEMBER 31, 2003
-------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
----------- ---------- ---------- ----------
U.S. government agency mortgage
backed securities and
collateralized mortgage
obligations........................... $239,092 $ 4,695 $(1,060) $242,727
Corporate collateralized mortgage
obligations........................... 4,910 -- (1) 4,909
Tax exempt municipal securities.......... 192,417 11,141 (163) 203,395
Taxable municipal securities............. 3,855 2 -- 3,857
Federal Home Loan Bank stock............. 209,633 -- -- 209,633
Other.................................... 4,363 391 (13) 4,741
-------- ------- ------- --------
Total.................................... $654,270 $16,229 $(1,237) $669,262
======== ======= ======= ========
All securities are classified as available-for-sale and may be sold as
part of our asset/liability management strategy in response to changes in
interest rates, liquidity needs or significant prepayment risk.
Available-for-sale securities are carried at fair value, with related unrealized
net gains or losses, net of deferred income taxes, recorded as an adjustment to
equity capital. At June 30, 2004, reported stockholders' equity reflected
unrealized securities gains net of tax of $3.1 million. This represented a
decline of approximately $6.8 million from unrealized securities gains net of
tax of $9.9 million at December 31, 2003. The decrease was the result of an
increase in interest rates during the quarter, which reduced the market value of
the bank's fixed-income investment portfolio. The market value of fixed-income
securities moves in the opposite direction of interest rates.
Securities available-for-sale increased to $722.6 million at June 30,
2004, up 8% from $669.3 million as of December 31, 2003. The growth in the
investment security portfolio since December 31, 2003 resulted from the
continued implementation of our asset/liability management strategy. Compared to
December 31, 2003, investments in U.S. government agency mortgage-backed
securities and CMOs increased by $21.8 million from $242.7 million to $264.6
million; investments in tax-exempt municipal securities increased by $34.3
million from $203.4 million to $237.7 million.
Investments in FHLB stock decreased by $1.5 million from $209.6 million
to $208.1 million, $207.0 million of which is stock of the FHLB (Chicago).
Currently, we plan to limit our FHLB stock investment to no more than the $208.5
million we had outstanding at December 31, 2003. The FHLB (Chicago) paid a 6.5%
(annualized) dividend in the first, second and third quarters of 2003 and the
first quarter of 2004 and a 7.0% (annualized) dividend in the fourth quarter
2003. The FHLB (Chicago) recently announced that it will maintain an annualized
dividend payment of 6.0% for the second quarter 2004, payable to shareholders in
the third quarter 2004. In a press release dated June 30, 2004, the FHLB
(Chicago) also recently announced that it has entered into a written agreement
with its regulator agreeing to implement various changes to enhance its risk
management, capital management, governance and internal control practices. The
FHLB (Chicago) agreed to limit their growth rate as well as maintain a capital
ratio of 5.1% versus a regulatory minimum of 4.0%, which may impact the future
level of dividends the FHLB (Chicago) may pay, as well as the FHLB (Chicago)'s
current practice regarding allowing the immediate redemption of its stock. The
Company continues to closely monitor the situation at the FHLB (Chicago) and
continues to believe the FHLB (Chicago) stock is a prudent investment for the
Company; the Company has no immediate plans to substantially reduce the size of
this investment. In the event the FHLB (Chicago) substantially reduces the
amount of or eliminates the dividend payable on its stock, our interest income
and, accordingly, our earnings, may be adversely affected. During the second
quarter of 2004, dividends received on our investment in FHLB (Chicago) stock
represented $3.1 million, or 13%, of our interest income for the quarter.
35
DEPOSITS AND FUNDS BORROWED
The following table presents the balances of deposits by category and
each category as a percentage of total deposits at June 30, 2004 and December
31, 2003:
JUNE 30, DECEMBER 31,
---------------------- ----------------------
2004 2003
---------------------- ----------------------
PERCENT PERCENT
BALANCE OF TOTAL BALANCE OF TOTAL
--------- ---------- --------- ----------
(DOLLARS IN THOUSANDS)
Non-interest bearing demand... $ 163,543 10% $ 135,110 9%
Savings....................... 11,871 1% 9,795 1%
Interest-bearing demand....... 89,810 5% 85,083 5%
Money market.................. 671,334 40% 552,439 36%
Brokered deposits............. 413,813 25% 447,948 29%
Other time deposits........... 323,033 19% 316,984 20%
---------- --- ---------- ---
Total deposits............. $1,673,404 100% $1,547,359 100%
========== === ========== ===
Total deposits of $1.7 billion at June 30, 2004 represent an increase
of $126.0 million or 8% as compared to total deposits of $1.5 billion as of
December 31, 2003. Non-interest-bearing demand deposits increased by 21% to
$163.5 million at June 30, 2004 as compared to $135.1 million at December 31,
2003. Interest-bearing demand deposits increased 6% to $89.8 million as compared
to $85.1 million at December 31, 2003. Money market accounts increased by $118.9
million, or 22%, to $671.3 million at June 30, 2004 as compared to $552.4
million at December 31, 2003. Brokered deposits decreased by 8% or $34.1 million
to $413.8 million at June 30, 2004 as compared to $447.9 million at December 31,
2003. Other time deposits increased by approximately $6.0 million to $323.0
million as compared to $317.0 million at year-end 2003 due to growth in core
deposits.
We continue to utilize brokered deposits as a source of funding for
growth in the loan and investment portfolios. We have issued certain brokered
deposits that include call option provisions, which provide us with the
opportunity to repay the certificates of deposit on a specified date prior to
the contractual maturity date. During the first and second quarters of 2004, we
maintained the use of FHLB advances as a funding source, called two brokered
deposits and lengthened the maturities of certain brokered deposits, taking
advantage of more favorable long-term rates. On March 30, 2004, we notified the
Depository Trust Company of our intent to call two brokered deposits. The
deposits, a $15.0 million 4-year original maturity at 3.50% deposit and a $10.0
million 20-year original maturity at 6.00% deposit, were redeemed on April 14,
2004 and April 26, 2004, respectively. Remaining prepaid broker commissions of
$170,000 relating to these two deposits were amortized between the notification
date and the call redemption dates. Therefore, amortization expense was higher
in the second quarter than if we had held these brokered deposits to their
maturity. The bank replaced these called brokered deposits with new brokered
deposits. The new deposits, a $15.0 million deposit entered into on March 26,
2004 with a 4-year maturity at 3.20% and a $10.0 million deposit entered into on
April 23, 2004 with a 20-year maturity at 5.50%, are also callable. While there
was no meaningful impact to our net interest margin in the first quarter of 2004
associated with our call of these two deposits as the majority of the $170,000
fee amortization expense occurred in April of 2004, the second quarter's margin
was negatively impacted by the higher fee amortization associated with our call
of these two deposits.
36
As of June 30, 2004, there were four outstanding brokered deposits
containing unexercised call provisions. We have brokered deposits with eight
different brokers and we receive periodic information from other brokers
regarding potential deposits. The scheduled maturities of brokered deposits, net
of unamortized prepaid broker commissions, as of June 30, 2004, for the fiscal
years 2004 through 2007 and thereafter, are as follows:
BROKERED DEPOSITS NET OF UNAMORTIZED PREPAID BROKER COMMISSIONS
(IN THOUSANDS)
--------------
MATURITY DATE RATE(1) 6/30/2004 12/31/2003 6/30/2003
------------- ------- --------- ---------- ---------
07/17/03 2.25% -- -- 20,000
07/21/03 2.45% -- -- 15,312
07/24/03 2.40% -- -- 17,425
09/05/03 3.80% -- -- 2,394
10/17/03 2.05% -- -- 5,000
10/17/03 1.85% -- -- 6,699
10/17/03 2.05% -- -- 3,000
10/29/03 1.75% -- -- 20,000
12/31/03 1.80% -- -- 953
01/09/04 1.85% -- 10,000 10,000
01/15/04 1.70% -- 28,000 28,000
01/15/04 1.85% -- 18,423 18,448
01/22/04 1.70% -- 10,000 10,000
01/22/04 1.90% -- 12,000 12,000
01/30/04 1.85% -- 11,837 11,872
02/19/04 1.60% -- 25,000 25,000
02/26/04 1.80% -- 30,000 30,000
03/26/04 1.50% -- 10,426 10,549
04/19/04 2.25% -- 5,000 5,000
04/21/04 2.10% -- 10,000 10,000
05/28/04 1.50% -- 21,000 21,000
06/30/04 1.35% -- 3,551 --
07/09/04 1.95% 4,999 4,999 5,000
07/23/04 1.40% 5,500 5,500 --
07/30/04 1.10% 10,000 10,000 --
08/04/04 1.75% 10,000 10,000 10,000
08/30/04 2.50% 25,000 25,000 25,000
09/10/04 1.50% 5,000 5,000 --
09/27/04 1.45% 16,650 16,700 --
09/27/04 1.75% 11,423 11,448 11,448
10/18/04 2.30% 7,668 7,668 7,668
10/29/04 1.45% 3,000 3,000 --
11/29/04 1.75% 10,000 10,000 10,000
12/30/04 1.45% 6,513 6,513 --
12/30/04 1.65% 5,000 5,000 --
01/24/05 2.25% 10,000 10,000 10,000
01/25/05 1.65% 2,500 2,500 --
01/28/05 1.45% 10,000 -- --
01/28/05 1.65% 10,000 -- --
01/31/05 2.15% 15,000 15,000 15,000
02/25/05 1.65% 18,100 -- --
02/28/05 2.05% 7,233 7,233 7,233
03/11/05 1.80% 5,000 5,000 --
03/23/05 1.80% 4,000 -- --
03/28/05 1.45% 5,000 -- --
05/02/05 1.75% 1,279 1,279 --
05/09/05 1.85% 2,000 2,000 2,000
05/26/05 2.05% 20,000 --
06/23/05 2.05% 8,000 --
08/01/05 1.65% 6,000 6,000 --
08/26/05 2.00% 7,000 --
08/26/05 2.10% 5,500
09/19/05 2.30% 5,000 5,000
09/19/05 2.00% 5,000
11/09/05 2.05% 1,980 2,000 2,000
37
11/23/05 2.10% 15,000 15,000 15,000
11/28/05 2.50% 10,250
03/17/06 2.05% 7,500
05/22/06 2.20% 9,980 9,980 10,000
05/23/06 2.40% 20,000 20,000 20,000
09/18/06 2.35% 4,000
09/26/06 2.20% 5,000
09/28/07 3.50% 15,000
11/13/07 3.40% 6,973 6,988 7,000
03/17/08 3.05% 4,188
03/26/08 (2) 3.20% 15,000
01/21/14 (2) 5.00% 10,000
02/27/19 5.50% 12,500
10/24/23 6.00% 10,000
03/12/24 (2) 5.75% 9,915
03/18/24 (2) 0.00% 5,939
04/23/24 (2) 5.50% 9,860
-------- -------- --------
Total brokered deposits............ $415,450 $449,045 $440,001
Unamortized prepaid broker
commissions........................ (1,637) (1,097) (1,349)
-------- -------- --------
Total brokered deposits, net of
unamortized prepaid broker
commissions........................ $413,813 $447,948 $438,652
======== ======== ========
- ------------------
(1) Represents the coupon rate of each brokered deposit.
(2) These brokered deposits are callable: 1) $10.0 million with a maturity
of 3/12/2024 and a call date of 9/24/2004; 2) $10.0 million with a
maturity of 1/21/2014 and a call date of 7/21/2004; 3) $9.9 million
with a maturity of 4/23/2024 and a call date of 10/23/2004; 4) $15.0
million with a maturity of 3/26/2008 and a call date of 9/26/2004; 5)
$6.0 million with a maturity of 3/18/24 and a call date of 9/18/04.
38
Membership in the FHLB System gives us the ability to borrow funds from
the FHLB (Chicago) and from the FHLB (Des Moines) under a variety of programs.
We have periodically used the services of the FHLB for funding needs and other
correspondent services.
During the second quarter of 2004, our reliance on FHLB borrowings as a
funding source remained the same as in the first quarter of 2004. FHLB
borrowings totaled $230.7 million at June 30, 2004 compared to $65.8 million at
June 30, 2003 and $156.2 million at December 31, 2003.
A summary of all funds borrowed and outstanding at June 30, 2004,
December 31, 2003 and June 30, 2003 is presented in the table below:
CURRENT
LONG TERM FUNDS BORROWED: RATE MATURITY 6/30/2004 12/31/2003 6/30/2003
- ------------------------- ---- -------- --------- ---------- ---------
FHLB fixed advance (1) 4.16% 09/04/2007 25,000 25,000 --
Subordinated note 3.35% 02/11/2007 -- -- 5,000
FHLB fixed advance 2.87% 11/14/2006 25,000 25,000 --
FHLB fixed advance 2.43% 07/17/2006 1,000 1,000 --
FHLB fixed advance 2.12% 01/17/2006 2,000 2,000 --
FHLB fixed advance 2.28% 01/03/2006 10,000 10,000 --
FHLB fixed advance 2.31% 11/07/2005 2,000 2,000 --
FHLB fixed advance (2) 6.50% 10/24/2005 25,695 26,225 26,752
FHLB fixed advance 2.40% 09/06/2005 5,000 5,000 --
FHLB fixed advance 1.69% 08/17/2005 25,000 -- --
FHLB fixed advance 1.83% 07/15/2005 3,000 3,000 --
-------- -------- --------
TOTAL LONG-TERM FUNDS BORROWED 123,695 99,225 31,752
SHORT TERM FUNDS BORROWED:
FHLB fixed advance 1.91% 06/15/2005 7,000 7,000 --
FHLB fixed advance 1.96% 06/15/2005 25,000 25,000 --
FHLB fixed advance 1.95% 05/09/2005 2,000 2,000 --
FHLB fixed advance 1.55% 01/30/2005 25,000 -- --
FHLB fixed advance 1.45% 01/13/2005 1,000 1,000 --
FHLB fixed advance 1.59% 12/15/2004 10,000 10,000 --
FHLB fixed advance 1.56% 12/13/2004 2,000 2,000 --
FHLB fixed advance 1.56% 11/16/2004 5,000 5,000 --
FHLB fixed advance 1.74% 11/08/2004 3,000 3,000 --
FHLB fixed advance 1.57% 10/25/2004 2,000 2,000 --
FHLB fixed advance 1.31% 10/20/2004 25,000 -- --
FHLB fixed advance 1.61% 01/16/2004 -- -- 1,000
FHLB fixed advance 6.21% 12/05/2003 -- -- 30,000
FHLB fixed advance 1.73% 11/07/2003 -- -- 6,000
FHLB fixed advance 2.74% 07/17/2003 -- -- 1,000
FHLB fixed advance 2.21% 07/17/2003 -- -- 1,000
Borrowing under revolving
line of credit facility 3.50% 12/01/2003 -- -- 30,000
Fed funds purchased 1.11% Daily 64,000 50,000 52,000
Demand repurchase agreements (3) 0.90% Daily 11,752 13,338 17,681
-------- -------- --------
TOTAL SHORT-TERM FUNDS BORROWED 182,752 120,338 138,681
-------- -------- --------
TOTAL FUNDS BORROWED $306,447 $219,563 $170,433
======== ======== ========
<FN>
(1) The Company has the right to cancel this advance after one year
and semi-annually thereafter with 5-business day written notice.
(2) This FHLB advance is subject to a fair value hedge utilizing an interest
rate swap with a fair value of $1.3 million. The contractual par amount on
the advance is $25.0 million.
(3) Demand repurchase agreements are a form of retail repurchase agreements
offered to certain clients of The PrivateBank (Chicago). Funds are swept
each business day from the client's demand deposit account. These amounts
are not deposits and are not insured, but are secured by a pool of
securities pledged specifically for this purpose.
</FN>
The Company has a $40.0 million revolving credit facility with a
commercial bank that matures on December 1, 2004. At June 30, 2004, we had a
zero balance outstanding under the line, compared to $30.0 million outstanding
at June 30, 2003. On July 30, 2003, the outstanding balance on the line of
39
credit was paid in full using proceeds from the common stock offering completed
on July 30, 2003. The interest rate on any borrowings under this revolving line
resets quarterly, and is based on, at our option, either the lender's prime rate
or three-month LIBOR +120 basis points with a floor of 3.50%. Historically, we
have elected to pay interest based on the three-month LIBOR rate +120 basis
points.
As of June 30, 2003, we had a $5.0 million subordinated note
outstanding. The interest on the subordinated note was reset each quarter based
on the three-month LIBOR rate +200 basis points. The note was payable in full on
or before February 11, 2007, and provided for certain rate escalation beginning
after February 11, 2002. On August 19, 2003, the subordinated note was paid in
full.
CAPITAL RESOURCES
Stockholders' equity rose to $173.7 million at June 30, 2004, an
increase of $6.7 million from December 31, 2003 stockholders' equity of $167.0
due primarily to year-to-date 2004 net income of $12.4 million and a decrease of
$6.8 million for the fair value of securities classified as available-for-sale,
net of income taxes.
On July 30, 2003, the Company completed its sale of 1.955 million
shares of common stock in an underwritten public offering. The public offering
price was $31.25. Net proceeds to the Company totaled approximately $57.2
million.
At June 30, 2004, $20.0 million of our outstanding trust-preferred
securities was treated as Tier 1 capital. The Company and its banking
subsidiaries are subject to regulatory capital requirements administered by
federal banking agencies. Capital adequacy guidelines and prompt corrective
action regulations involve quantitative measures of assets, liabilities and
certain off-balance-sheet items calculated under regulatory accounting
practices. Capital amounts and classifications are also subject to qualitative
judgments by regulators about components, risk weightings and other factors, and
the regulators can lower classifications in certain areas. Failure to meet
various capital requirements can initiate regulatory action that could have a
direct material effect on the financial statements.
The prompt corrective action regulations provide five classifications:
well-capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized, and critically undercapitalized, although these terms are not
used to represent overall financial condition. If a banking subsidiary is not
"well capitalized," regulatory approval is required to accept brokered deposits.
If undercapitalized, capital distributions are limited as is asset growth and
expansion and plans for capital restoration are required.
40
The following table sets forth our consolidated regulatory capital
amounts and ratios as of June 30, 2004 and 2003, and December 31, 2003:
JUNE 30, DECEMBER 31,
----------------------------------------------------------- ----------------------------
2004 2003 2003
---------------------------- ---------------------------- ----------------------------
"Well- "Well- "Well-
capital- Excess/ capital- Excess/ capital- Excess/
ized" (Deficit) ized" (Deficit) ized" (Deficit)
Capital Standard Capital Capital Standard Capital Capital Standard Capital
------- -------- ------- ------- -------- ------- ------- -------- -------
DOLLAR BASIS:
Tier 1 leverage
capital......... $167,782 $107,140 $60,642 $86,777 $82,959 $3,818 $155,431 $94,171 $61,260
Tier 1 risk-based
capital......... 167,782 91,486 76,296 86,777 73,728 13,049 155,431 80,495 74,936
Total risk-based
capital......... 185,087 152,476 32,611 102,796 122,881 (20,085) 170,531 134,158 36,373
PERCENTAGE BASIS:
Leverage ratio..... 7.83% 5.00% 5.23% 5.00% 8.25% 5.00%
Tier 1 risk-based
capital ratio... 11.00 6.00 7.06 6.00 11.59 6.00
Total risk-based
capital ratio... 12.14 10.00 8.37 10.00 12.71 10.00
Total equity to
total assets.... 7.90 5.70 8.41
To be considered "well-capitalized," an entity must maintain a leverage
ratio of at least 5.0%, a Tier 1 risk-based capital ratio of at least 6.0%, and
a total risk-based capital ratio of at least 10.0%. To be "adequately
capitalized," a bank must maintain a leverage ratio of at least 4.0%, a Tier 1
risk-based capital ratio of at least 4.0%, and a total risk-based capital ratio
of at least 8.0%. At June 30, 2004, the Company and each of the banking
subsidiaries exceeded the minimum levels of all regulatory capital requirements,
and were considered "well-capitalized" under regulatory standards.
LIQUIDITY
Liquidity measures our ability to meet maturing obligations and its
existing commitments, to withstand fluctuations in deposit levels, to fund our
operations and to provide for clients' credit needs. Our liquidity principally
depends on cash flows from operating activities, investment in and maturity of
assets, changes in balances of deposits and borrowings and our ability to borrow
funds in the money or capital markets.
Net cash used in operations was $8.4 million in the six months ended
June 30, 2004 compared to net cash provided by operations of $13.4 million in
the prior year period. The net cash provided during the six months ended June
30, 2004 was impacted by the growth and timing of receipts of interest and cash
settlement payments. Net cash outflows from investing activities were $246.7
million in the first six months of 2004 compared to a net cash outflow of $188.0
million in the prior year period. Cash inflows from financing activities in the
first six months of 2004 were $212.4 million compared to a net inflow of $200.7
million in the first six months of 2003.
In the event of short-term liquidity needs, our banking subsidiaries
may purchase federal funds from correspondent banks. Membership in the FHLB
System gives the banking subsidiaries the ability to borrow funds from the FHLB
for short- or long-term purposes under a variety of programs.
Subject to the waiver of the required notice period upon redemption,
our investment in FHLB stock is a source of liquidity for us. At June 30, 2004,
we owned $208.1 million of FHLB stock, $207.0 million of which is stock of the
FHLB (Chicago). We can elect at any time to sell FHLB stock at par back to the
FHLB, excluding the required FHLB stock minimum that needs to be maintained in
order
41
to support existing FHLB advances. We are required to maintain a ratio of 20:1
of FHLB borrowings to FHLB stock. As of June 30, 2004, we had $230.7 million
dollars in advances from the FHLB ($212.7 million from the FHLB (Chicago) and
$18.0 million from the FHLB (Des Moines)). We were required to hold $11.5
million in FHLB stock at June 30, 2004 and the remaining $196.7 million of FHLB
stock can be redeemed. FHLB has communicated to us that generally the stock will
be redeemed immediately upon a request by us, however, FHLB can legally require
six months advance notice of the stock sale before the stock is actually
liquidated for cash at its par value. Alternatively, FHLB can redeem, at any
time, any FHLB stock we own, in excess of the required minimum. During the
second quarter of 2004, we sold $3.1 million of FHLB stock, which was redeemed
in one business day. Currently, we plan to limit our FHLB stock investment to no
more than the $208.5 million we had outstanding at December 31, 2003. The FHLB
(Chicago) paid a 6.5% (annualized) dividend in the first, second and third
quarters of 2003 and the first quarter of 2004 and a 7.0% (annualized) dividend
in the fourth quarter 2003. The FHLB (Chicago) recently announced that it will
maintain an annualized dividend payment of 6.0% for the second quarter 2004,
payable to shareholders in the third quarter 2004. In a press release dated June
30, 2004, the FHLB (Chicago) also recently announced that it has entered into a
written agreement with its regulator agreeing to implement various changes to
enhance its risk management, capital management, governance and internal control
practices. The FHLB (Chicago) agreed to limit their growth rate as well as
maintain a capital ratio of 5.1% versus a regulatory minimum of 4.0%, which may
impact the future level of dividends the FHLB (Chicago) may pay, as well as the
FHLB (Chicago)'s current practice regarding allowing the immediate redemption of
its stock. The Company continues to closely monitor the situation at the FHLB
(Chicago) and continues to believe the FHLB (Chicago) stock is a prudent
investment for the Company; the Company has no immediate plans to substantially
reduce the size of this investment. In the event the FHLB (Chicago)
substantially reduces the amount of or eliminates the dividend payable on its
stock, our interest income and, accordingly, our earnings, may be adversely
affected. During the second quarter of 2004, dividends received on our
investment in FHLB (Chicago) stock represented $3.1 million, or 13%, of our
interest income for the quarter.
During the six months ended June 30, 2004, we increased the level of
FHLB advances while the level of brokered deposits decreased slightly. During
the first quarter of 2004, our utilization of FHLB advances increased due to new
advances obtained to take advantage of the availability of longer maturity
advances at lower rates. Management anticipates that our reliance on FHLB
borrowings and brokered deposits as a funding source will continue for the
remainder of 2004 to the extent that brokered deposit pricing rates continue to
be attractive and our available collateral for FHLB advances remains at current
levels. Our asset/liability policy currently limits our use of brokered deposits
to levels no more than 40% of total deposits. Consistent with this policy,
brokered deposits represented 25% of total deposits at June 30, 2004 compared to
30% of total deposits at June 30, 2003. We do not expect our 40% threshold
limitation to limit our ability to implement our growth plan.
42
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
RISK MANAGEMENT
We are exposed to market risk from changes in interest rates that could
affect our results of operations and financial condition. We manage our exposure
to these market risks through our regular operating and financing activities. We
hedge our interest rate risk through the use of derivative financial
instruments. We use derivative financial instruments as risk management tools.
One of two interest rate swaps we have entered into is designated as a
fair value hedge of a fixed rate $25.0 million advance from the FHLB (Chicago).
We entered into this interest rate swap transaction in 2001 and we agreed to
receive a fixed rate in exchange for payment of a 3-month LIBOR floating rate
based on an agreed-upon notional amount of $25.0 million. The fair value of the
interest rate swap was $1.3 million as of June 30, 2004, a decrease of $766,000
as compared to December 31, 2003.
The Company entered into a $25 million interest rate swap during the
third quarter of 2002, swapping the 10-year treasury rate for 3-month LIBOR to
serve as an economic hedge of a portion of the Company's available-for-sale
municipal bond securities portfolio. The June 30, 2004 fair market value
adjustment on this swap resulted in the trading gain of $259,000 for the six
months ended June 30, 2004, with a corresponding derivative liability of the
same amount. This swap does not qualify for hedge accounting treatment pursuant
to SFAS No. 133 ("Accounting for Derivative Instruments and Hedging Activities")
and, accordingly, changes in the fair value of the swap are reported in other
non-interest income. At June 30, 2004, the carrying value of the trading swap
was an asset of $194,000.
ASSET/LIABILITY MANAGEMENT POLICY
As a continuing part of our financial strategy, we attempt to manage the
impact of fluctuations in market interest rates on our net interest income. This
effort entails providing a reasonable balance between interest rate risk, credit
risk, liquidity risk and maintenance of yield. Asset/liability management policy
is established by our investment committee of our board of directors and is
monitored by management. Our asset/liability management policy sets standards
within which we are expected to operate. These standards include guidelines for
exposure to interest rate fluctuations, liquidity, loan limits as a percentage
of funding sources, exposure to correspondent banks and brokers, and reliance on
non-core deposits. The policy also states our reporting requirements to our
board of directors. The investment policy complements the asset/liability
management policy by establishing criteria by which we may purchase securities.
These criteria include approved types of securities, brokerage sources, terms of
investment, quality standards, and diversification.
We measure the impact of interest rate changes on our income statement
through the use of gap analysis. The gap represents the net position of assets
and liabilities subject to repricing in specified time periods. During any given
time period, if the amount of rate sensitive liabilities exceeds the amount of
rate sensitive assets, a company would generally be considered negatively gapped
and would benefit from falling rates over that period of time. Conversely, a
positively gapped company would generally benefit from rising rates.
We have structured our assets and liabilities to mitigate the risk of
either a rising or falling interest rate environment. We manage our gap position
at the one-year horizon. Depending upon our assessment of economic factors such
as the magnitude and direction of projected interest rates over the short- and
long-term, we generally operate within guidelines set by our asset/liability
management policy and attempt to maximize our returns within an acceptable
degree of risk. Our policy states that we shall maintain a rate sensitive assets
to rate sensitive liabilities position at the one-year horizon between 70% and
130%. Our position at June 30, 2004 was 97% as compared to 101% at December 31,
2003 and was within the guidelines of our policy. We have continued to maintain
our gap position set by our policy
43
guidelines and expect to continue to operate in this manner as long as the
general rate structure of the economy and our business opportunities remain
consistent. Therefore, generally speaking, a short-term rise in interest rates
will positively impact our earnings, while a short-term drop in interest rates
would negatively impact our earnings.
Interest rate changes do not affect all categories of assets and
liabilities equally or simultaneously. There are other factors that are
difficult to measure and predict that would influence the effect of interest
rate fluctuations on our income statement. For example, a rapid drop in interest
rates might cause our loans to repay at a more rapid pace and certain
mortgage-related investments to prepay more quickly than projected. This could
mitigate some of the benefits of falling rates that are expected when negatively
gapped. Conversely, a rapid rise in rates could give us an opportunity to
increase our margins and stifle the rate of repayment on our mortgage-related
loans, which would increase our returns. The following tables illustrate our
estimated interest rate sensitivity and periodic and cumulative gap positions
calculated as of June 30, 2004 and December 31, 2003:
JUNE 30, 2004
TIME TO MATURITY OR REPRICING
-----------------------------
0-90 91-365 1-5 OVER 5
DAYS DAYS YEARS YEARS TOTAL
---- ---- ----- ----- -----
(DOLLARS IN THOUSANDS)
INTEREST-EARNING ASSETS
Net loans $ 962,500 $ 118,208 $ 301,750 $ 14,242 $1,396,700
Investments 36,607 28,925 129,662 358,958 554,153
FHLB stock 208,097 -- -- -- 208,097
Fed funds sold 810 -- -- -- 810
----------- ---------- ---------- ---------- ----------
Total interest-earning assets $ 1,208,014 $ 147,133 $ 431,413 $ 373,200 $2,159,759
=========== ========== ========== ========== ==========
INTEREST-BEARING LIABILITIES
Interest-bearing demand deposits $ -- $ -- $ -- $ 89,810 $ 89,810
Savings deposits 11,871 -- -- -- 11,871
Money market deposits 671,334 -- -- -- 671,334
Time deposits 137,890 131,132 53,911 100 323,033
Brokered deposits 86,935 150,293 128,371 48,214 413,813
Funds borrowed 100,752 107,000 118,695 -- 326,447
----------- ---------- ---------- ---------- ----------
Total interest-bearing liabilities $ 1,008,782 $ 388,425 $ 300,977 $ 138,124 $1,836,308
=========== ========== ========== ========== ==========
CUMULATIVE
Rate sensitive assets (RSA) $ 1,208,014 $1,355,147 $1,786,560 $2,159,759
Rate sensitive liabilities (RSL) 1,008,782 1,397,207 1,698,184 1,836,308
GAP (GAP=RSA-RSL) 199,232 (42,060) 88,375 323,451
RSA/RSL 119.75% 96.99% 105.20% 117.61%
RSA/Total assets 54.93% 61.62% 81.24% 98.21%
RSL/Total assets 45.87% 63.53% 77.22% 83.50%
GAP/Total assets 9.06% -1.91% 4.02% 14.71%
GAP/Total RSA 9.22% -1.95% 4.09% 14.98%
44
DECEMBER 31, 2003
TIME TO MATURITY OR REPRICING
-----------------------------
0-90 91-365 1-5 OVER 5
DAYS DAYS YEARS YEARS TOTAL
---- ---- ----- ----- -----
(DOLLARS IN THOUSANDS)
INTEREST-EARNING ASSETS0
Net loans $ 807,928 $ 126,498 $ 269,343 $ 12,278 $1,216,046
Investments 77,785 94,530 81,997 214,082 468,394
FHLB stock 209,633 209,633
Fed funds sold 45 -- -- -- 45
---------- ---------- -------- -------- ----------
Total interest-earning assets $1,095,391 $ 221,028 $ 351,340 $226,360 $1,894,117
---------- ---------- -------- -------- ----------
INTEREST-BEARING LIABILITIES
Interest-bearing demand deposits $ -- $ -- $ -- $ 85,083 $ 85,083
Savings deposits 11,352 -- -- -- 11,352
Money market deposits 574,214 -- -- -- 574,214
Time deposits 134,018 132,709 49,852 -- 316,579
Brokered deposits 155,686 161,349 122,980 10,000 450,015
Funds borrowed 84,338 47,000 107,000 -- 238,338
---------- ---------- -------- -------- ----------
Total interest-bearing liabilities $ 959,608 $ 341,058 $ 279,832 $ 95,083 $1,675,581
---------- ---------- -------- -------- ----------
CUMULATIVE
Rate sensitive assets (RSA) $1,095,391 $1,316,419 $1,667,759 $1,894,119
Rate sensitive liabilities (RSL) 959,608 1,300,666 1,580,498 1,675,581
GAP (GAP=RSA-RSL) 135,783 15,753 87,261 218,538
RSA/RSL 114.15% 101.21% 105.52% 113.04%
RSA/Total assets 55.21% 66.35% 84.06% 95.47%
RSL/Total assets 48.37% 65.56% 79.66% 84.45%
GAP/Total assets 6.84% 0.79% 4.40% 11.01%
GAP/Total RSA 12.40% 1.20% 5.23% 11.54%
The following table shows the impact of immediate 200 and 100 basis
point changes in interest rates as of June 30, 2004 and December 31, 2003. The
effects are determined through the use of a simulation model based on our
interest-earning asset and interest-bearing liability portfolios, assuming the
size of these portfolios remains constant from the balance sheet date throughout
the one-year measurement period. The simulation assumes that assets and
liabilities accrue interest on their current pricing basis. Assets and
liabilities then reprice based on their terms and remain at that interest rate
through the end of the measurement period. The model attempts to illustrate the
potential change in net interest income if the foregoing occurred.
JUNE 30, 2004 DECEMBER 31, 2003
------------- -----------------
+200 -200 -100 +200 -200 -100
BASIS BASIS BASIS BASIS BASIS BASIS
POINTS POINTS POINTS POINTS POINTS POINTS
------ ------ ------ ------ ------ ------
Percentage change in net interest
income due to an immediate 200 or
100 basis point change in interest
rates over a one-year time horizon... (1.5)% (3.4)% 1.7% 4.1% (9.2)% (5.9)%
This table shows that if there had been an instantaneous parallel shift
in the yield curve of -100 basis points on June 30, 2004, net interest income
would increase by 1.7% over a one-year period. Due to current market interest
rates, a -100 basis point shift is presented for June 30, 2004 as a more
reasonable illustration of possible rate changes. The measurement of a -200
basis point instantaneous parallel shift in the yield curve at June 30, 2004
would result in a decline in net interest income of 3.4% over a one-year period
versus a decline of 9.2% at December 31, 2003. At December 31, 2003, if there
had been an instantaneous parallel shift in the yield curve of -100 we would
have suffered a decline in net interest income of 5.9%. Conversely, a shift of
+200 basis points would decrease net interest income
45
1.5% over a one-year horizon based on June 30, 2004 balances, as compared to an
increase of net interest income of 4.1% measured on the basis of the December
31, 2003 portfolio.
Changes in the effect on net interest income from the presented basis
point movements at June 30, 2004, compared to December 31, 2003 are due to the
timing and nature of the repricing of rate sensitive assets to rate sensitive
liabilities within the one year time frame. The difference in the effect on net
interest income at June 30, 2004 as compared to December 31, 2003 is due to the
differences in the timing, balances, and current rates versus simulated rates of
repricing assets and liabilities.
Management's likely reaction to changes in interest rates is
incorporated in assumptions made in these calculations. Differences in these
assumptions between the reporting periods have also had the effect of reducing
the impact of a changing interest rate environment.
The preceding sensitivity analysis is based on numerous assumptions
including the nature and timing of interest rate levels including the shape of
the yield curve, prepayments on loans and securities, changes in deposit levels,
pricing decisions on loans and deposits, reinvestment/replacement of asset and
liability cash flows and others. While assumptions are developed based upon
current economic and local market conditions, we cannot make any assurances as
to the predictive nature of these assumptions including how client preferences
or competitor influences might change.
ITEM 4. CONTROLS AND PROCEDURES
As of the end of the period covered by this report, the Company's Chief
Executive Officer and Chief Financial Officer carried out an evaluation under
their supervision, with the participation of other members of management as they
deemed appropriate, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures as contemplated by Exchange Act
Rule 13a-15. Based upon, and as of the date of that evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that the Company's
disclosure controls and procedures are effective, in all material respects, in
timely alerting them to material information relating to the Company (and its
consolidated subsidiaries) required to be included in the periodic reports the
Company is required to file and submit to the SEC under the Exchange Act.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995
This report contains certain forward-looking statements within the
meaning of Section 21E of the Securities Exchange Act of 1934, as amended. We
intend such forward-looking statements to be covered by the safe harbor
provisions for forward-looking statements contained in the Private Securities
Litigation Reform Act of 1995, and we are including this statement for purposes
of these safe harbor provisions. Forward-looking statements, which are based on
certain assumptions and describe our future plans, strategies and expectations,
can generally be identified by use of the words "believe," "expect," "intend,"
"anticipate," "estimate," "project," or similar expressions. Our ability to
predict results or the actual effect of future plans or strategies is inherently
uncertain and actual results may differ materially from those predicted in
forward-looking statements. Factors which might cause such a difference include,
but are not limited to, fluctuations in market rates of interest and loan and
deposit pricing; greater than anticipated deterioration in asset quality due to
a prolonged economic downturn in the greater Chicago and St. Louis metropolitan
areas; legislative or regulatory changes; adverse developments or changes in the
composition of our loan or investment portfolios; significant increases in
competition; changes in the current redemption practices of the FHLB (Chicago)
relating to its stock; difficulties in identifying attractive acquisition
opportunities or strategic partners to complement our private banking approach
and the products and services we offer; unexpected difficulties in integrating
or operating the mortgage banking business; unanticipated construction or other
delays relating to our new office to be located in the Palmolive Building;
unanticipated delays in regulatory approvals required to open in Wisconsin;
unanticipated delays in opening the planned Milwaukee location; the possible
dilutive effect of potential
46
acquisitions or expansion; and our ability to raise new capital as needed and
the timing, amount and type of such capital raises. These risks and
uncertainties should be considered in evaluating forward-looking statements and
undue reliance should not be placed on such statements.
PART II
ITEM 1. LEGAL PROCEEDINGS
From time to time, we may be party to various legal proceedings arising
in the normal course of our business. Since we act as a depository of funds, we
may be named from time to time as a defendant in various lawsuits (such as
garnishment proceedings) involving claims to the ownership of funds in
particular accounts. Neither PrivateBancorp nor any of our subsidiaries is
currently a defendant in any such proceedings that we believe will have a
material adverse effect on our business, results of operations, financial
condition or cash flows.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS AND ISSUER PURCHASES OF
EQUITY SECURITIES
On June 15, 2004, the Company completed its acquisition of Corley
Financial Corporation. In connection with the acquisition and as partial payment
of the purchase price, the Company newly issued 32,000 shares of common stock
(then valued at $875,640) to the selling shareholders of Corley. All of these
shares were issued in reliance on the exemption from registration pursuant to
Section 4(2) of the Securities Act of 1933.
The following table provides information about purchases by the Company
during the quarter ended June 30, 2004 of equity securities that are registered
by the Company pursuant to Section 12 of the Exchange Act.
(C)
TOTAL NUMBER OF (D)
(A) SHARES PURCHASED MAXIMUM NUMBER OF
(B) AS PART OF PUBLICLY SHARES THAT MAY BE
TOTAL NUMBER OF AVERAGE PRICE ANNOUNCED PLANS PURCHASED UNDER THE
PERIOD SHARES PURCHASED(1) PAID PER SHARE OR PROGRAMS PLANS/PROGRAM (2)
------ ------------------- -------------- ------------------- -------------------
04/01/04-04/30/04 -- -- -- 231,192
05/01/04-05/31/04 -- -- -- 231,192
06/01/04-06/30/04 -- -- -- 231,192
-------- -------- --------- -------
Total -- -- -- 231,192
<FN>
(1) Does not include shares reacquired by the Company in payment
of the exercise price and/or withholding taxes in connection
with the exercise of certain employee/director stock options.
(2) The Company's Board of Directors approved the repurchase by
the Company of up to an aggregate of 231,192 shares of its
common stock pursuant to the repurchase program that was
publicly announced on July 25, 2001 (the "Program"). Unless
terminated earlier by the Company's Board of Directors, the
Program will expire when the Company has repurchased all
shares authorized for repurchase thereunder.
</FN>
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's Annual Meeting of Stockholders held on April 22,
2004, the following matters were submitted to and approved by a vote
of Stockholders:
(1) The election of six Class III directors for a three-year
term ending at the Annual Meeting of Stockholders to be
held in 2007:
47
Directors Votes For Votes Withheld
--------- --------- --------------
Robert F. Coleman 8,635,290 60,553
James M. Guyette 7,184,530 1,511,313
Philip M. Kayman 8,638,190 57,653
Thomas F. Meagher 8,663,986 31,857
William J. Podl 8,636,187 59,656
William R. Rybak 8,022,457 5,785
The following directors continue to serve after the Annual
Meeting:
Continuing Director Term Expires
------------------- ------------
Ralph B. Mandell 2005
William A. Castellano 2005
William R. Langley 2005
Cheryl Mayberry-MacKissack 2005
Edward Rabin 2005
Patrick Daly 2005
Donald L. Beal 2006
William A. Goldstein 2006
Richard C. Jensen 2006
Michael B. Susman 2006
Jay Williams 2006
Robert F. Coleman 2007
James M. Guyette 2007
Philip M. Kayman 2007
Thomas F. Meagher 2007
William J. Podl 2007
William R. Rybak 2007
(2) Amendment of the Company's Amended and Restated
Certificate of Incorporation increasing the number of
authorized shares of common stock from 24,000,000 to
39,000,000:
Total votes for: 8,023,707
Total votes against: 667,599
Total votes abstaining: 5,785
ITEM 5. OTHER INFORMATION
None.
48
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
3.1 Certificate of amendment of the Amended and Restated Certificate of
Incorporation of PrivateBancorp, Inc., as amended (filed as an exhibit
to the Company's quarterly report on Form 10-Q for the quarter ended
March 31, 2004, and incorporated herein by reference).
3.2 Amended and Restated Certificate of Incorporation of PrivateBancorp,
Inc., as amended. (filed as an exhibit to the Company's quarterly
report on Form 10-Q for the quarter ended March 31, 2004, and
incorporated herein by reference).
3.3 Amended and Restated By-laws of PrivateBancorp, Inc. (filed as an
exhibit to the Company's Quarterly Report on Form 10-Q for the period
ended March 31, 2004 and incorporated herein by reference).
4.1 Certain instruments defining the rights of the holders of long-term
debt of the Company and certain of its subsidiaries, none of which
authorize a total amount of indebtedness in excess of 10% of the total
assets of the Company and its subsidiaries on a consolidated basis,
have not been filed as exhibits. The Company hereby agrees to furnish a
copy of any of these agreements to the SEC upon request.
15.0 Acknowledgment of Independent Registered Public Accounting Firm.
31.1 Certification of Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.0 Certification of Chief Executive Officer and Chief Financial Officer
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
99.1 Report of Independent Registered Public Accounting Firm.
(b) Reports on Form 8-K:
(1) Current Report on Form 8-K dated April 19, 2004 filed with the
SEC on April 19, 2004.
(2) Current Report on Form 8-K dated April 21, 2004 filed with the
SEC on April 21, 2004.
(3) Current Report on Form 8-K dated April 23, 2004 filed with the
SEC on April 23, 2004.
(4) Current Report on Form 8-K dated June 24, 2004 filed with the
SEC on June 24, 2004.
49
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report on Form 10-Q to be signed on its
behalf by the undersigned thereunto duly authorized.
PRIVATEBANCORP, INC.
(Registrant)
By: /s/ Ralph B. Mandell
-----------------------------
Ralph B. Mandell,
Chairman, President and
Chief Executive Officer
By: /s/ Dennis L. Klaeser
-----------------------------
Dennis L. Klaeser,
Chief Financial Officer
(principal financial officer)
By: /s/ Lisa M. O'Neill
-----------------------------
Lisa M. O'Neill,
Controller
(principal accounting officer)
Date: August 6, 2004
EXHIBIT INDEX
3.1 Certificate of amendment of the Amended and Restated Certificate of
Incorporation of PrivateBancorp, Inc., as amended (filed as an exhibit
to the Company's quarterly report on Form 10-Q for the quarter ended
March 31, 2004, and incorporated herein by reference).
3.2 Amended and Restated Certificate of Incorporation of PrivateBancorp,
Inc., as amended. (filed as an exhibit to the Company's quarterly
report on Form 10-Q for the quarter ended March 31, 2004, and
incorporated herein by reference).
3.3 Amended and Restated By-laws of PrivateBancorp, Inc. (filed as an
exhibit to the Company's Quarterly Report on Form 10-Q for the period
ended March 31, 2004 and incorporated herein by reference).
4.1 Certain instruments defining the rights of the holders of long-term
debt of the Company and certain of its subsidiaries, none of which
authorize a total amount of indebtedness in excess of 10% of the total
assets of the Company and its subsidiaries on a consolidated basis,
have not been filed as exhibits. The Company hereby agrees to furnish a
copy of any of these agreements to the SEC upon request.
15.0 Acknowledgment of Independent Registered Public Accounting Firm.
31.1 Certification of Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.0 Certification of Chief Executive Officer and Chief Financial Officer
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
99.1 Report of Independent Registered Public Accounting Firm.